By: Joseph Goldy, CFP®
The Secure Act 2.0 has created several new planning opportunities. One provision that will appeal to those inclined to charitable giving is the ability to direct a qualified charitable distribution from an IRA toward funding a charitable gift annuity.
What is a charitable gift annuity?
A charitable gift annuity (CGA) is an agreement between a donor and a charity. The donor agrees to provide the charity with a lump sum, and, in return, the charity will pay the donor a fixed monthly payment for life based on the annuity contract terms. When the donor passes away, the charity keeps the balance of the invested funds.
As the donor, you can fund the CGA with cash, appreciated stock, or property. Depending on what you use to support the CGA, your lifetime payments will be taxed as either capital gains, ordinary income, or a portion that could be tax-free. Minimum funding requirements for a charitable gift annuity depend on the charity but often start around $10,000 or more.
Secure Act 2.0 and Charitable Gift Annuities
The Secure Act 2.0 legislation passed in December 2022 increased the required minimum distribution (RMD) age for IRAs to 73 beginning in 2023. Meeting your IRA’s RMD using a qualified charitable distribution (QCD) is a great way to avoid paying federal tax on the IRA distribution.
The current annual limit on QCDs is $100,000, with the Secure Act raising that limit by indexing it to inflation beginning in 2024. A new opportunity, however, lies in the legislation allowing individuals to use up to $50,000 of QCD funds to fund a charitable gift annuity ($100,000 for couples).
Charitable Gift Annuity Example
Luke, 75, wants to do more with this year’s $40,000 required minimum distribution requirement for his IRA. Ideally, he would like to continue to support his favorite Type 1 diabetes charity, JDRF, but he can also use additional income.
As a larger organization, JDRF offers charitable gift annuities as a giving option. Based on the 2023 single-life annuity tables, at 75 years old, Luke can get a guaranteed 6.6% annual annuity payout for the rest of his life, or $220 a month ($2,640/year). He also avoids taxes on his IRA required minimum distribution since the funds were a qualified charitable distribution directly to the charity.
JDRF will be responsible for investing the $40,000 and will pay Luke his guaranteed $220 a month until he passes away, at which point the charity will then receive the remaining balance.
As an alternative to funding his CGA with a qualified charitable deduction from his IRA, Luke could have funded it with appreciated stock from his taxable brokerage account. The benefit would be that Luke avoids paying capital gains tax on his appreciated stock and may get a partial tax deduction for his donation. However, some of the income payments from his CGA would also be taxable.
Charity Gift Annuity Rules
While charitable gift annuities could make sense for some people looking to make a gift during their lifetime and receive some financial benefit from it in the form of income, there are some things to be aware of.
Must be set up at each charity - no way to set up a CGA for multiple charities.
Part of the income could be taxable as ordinary income.
Since part of the gift is for use by the charity, your payments may be lower than if you invested in a regular annuity.
Payments do not adjust for inflation.
It is an irrevocable gift to the charity.
To find organizations that offer charitable gift annuities, you can use the search tool provided by the American Council on Gift Annuities.
Since several moving parts to the Secure Act 2.0 provision allow qualified charitable distributions to fund a CGA, we recommend speaking with your tax professional to make sure any giving strategy makes sense for you. At Highland, we work closely with your CPA to ensure that a charitable gift annuity would fit your philanthropic plan while benefiting you and the charity.
Joseph Goldy, CFP®, is a wealth advisor and CERTIFIED FINANCIAL PLANNER™ at Highland Financial Advisors, LLC, a fee-only fiduciary wealth advisory firm based in Wayne, New Jersey.
Joe specializes in working with newly independent women because of divorce or losing a spouse. He understands firsthand the value of having a clear financial picture pre- and post-divorce and a plan to restate goals as a single person. When he is not helping clients, Joe enjoys spending time with his two sons outdoors and volunteering to help raise money for Type 1 diabetes organizations.