The gift that keeps on giving: Using an IRA to fund a charitable gift annuity
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According to the National Association of Gift Planners, the first Charitable Gift Annuity (CGA) was created in 1831 when American painter John Trumbull donated his paintings of the American Revolution to Yale University in exchange for a life annuity. Since then, universities, churches, and other charitable organizations have used CGAs.
With the passing of the SECURE 2.0 Act, donors over the age of 70.5 can now make a once-in-a-lifetime distribution from an IRA to a Charitable Gift Annuity through a qualified charitable distribution (QCD). So, how do you use an IRA QCD to fund a CGA?
IRA: Individual Retirement Account
IRAs or Individual Retirement Accounts are familiar to most investors. You probably have this account from making pre-tax donations to an IRA, or perhaps you rolled over your employer 401k to an IRA. These accounts continue to grow tax-deferred until you are required to take minimum distributions from this account. Required minimum distributions (RMD) begin at age 73 for those born in 1959 or earlier and age 75 for those born in 1960 or later. Since you have not paid taxes on these dollars, when you take money out of an IRA, you must pay income tax on the withdraw – unless used for a QCD.
QCD: Qualified Charitable Donation
Taxpayers aged 70.5 and older can donate up to $105,000 (in 2024) to charity(ies) from an IRA via a QCD. The gift must transfer directly from the IRA to the charitable organization to meet the QCD requirements. The amount of your gift is not deductible for tax purposes. Still, the direct distribution to the charity is not included on your tax return as a taxable IRA distribution either. And, if you’re at the age where you must take required minimum distributions (RMDs), this charitable gift counts toward the RMD, thereby reducing taxes owed.
CGA: Charitable Gift Annuity
A charitable gift annuity (CGA) is a lifelong contract between a donor and a 501(c)(3) qualified public charity. When you make a donation, the organization invests the gifted funds and then pays you a fixed income for life based on your age, life expectancy, and whether there are one or two beneficiaries. At the end of your life, or your spouse’s, if giving as a couple, the charity is entitled to the remainder of the gift.
IRA + QCD (RMD) = CGA
What happens when you make a QCD from your IRA to fund a CGA? And how does that impact your RMD? To recap, individuals aged 70½ and older can make a once-in-a-lifetime distribution directly from their IRA to one or more CGAs, which will be treated as a qualified charitable distribution (QCD) and count against your annual QCD limit.
In 2024, the maximum you can contribute to a CGA is $53,000 – you can contribute to more than one CGA, but the donations cannot total more than $53,000. If you donate $53,000 to CGAs, you still have $52,000 of your available QCD remaining ($105,000 max in 2024). This distribution is excluded from your taxable income, and if you are 73 years or older, it may be used to satisfy all or part of the IRS-mandated required minimum distributions (RMDs).
How It Works
We have discussed the terminology, but how does it work in real life? Let’s assume that John is 75 and wants to donate $53,000 to his favorite charity by establishing a charitable gift annuity. The charity will pay John $3,710 annually (7% annuity rate) for as long as he lives. The $53,000 gift satisfies his RMD, so he will not need to pay income tax on the distribution. However, he must pay income tax on the $3,710 annual income stream.
What’s the Catch?
While using a QCD from your IRA to fund a CGA can be a win/win for you and the charity, there are other things to consider. The gift is irrevocable; once you transfer your money, you can no longer access the funds. The payments are fixed and will not adjust for inflation. Your income stream is only as safe as the charity is sound – if the charity goes belly up, your income stream dries up.
Summary
This charitable giving strategy may or may not be right for you. I’m not sure if it was right for John Trumbull, but it was good for Yale University and those who appreciate art. You can still view Mr. Trumbull’s paintings at the Yale University Art Gallery and throughout Capitol Hill in Washington, D.C. I’d say that was a win/win for us.
Meredith Carbrey, CFP, is a Senior Wealth Advisor with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Meredith at mcarbrey@bedelfinancial.com