If you’re charitably inclined, a charitable gift annuity allows you to donate to charity while enjoying significant tax breaks and a lifetime income stream. And if you’re age 70½ or older, you can now transfer up to $53,000 ($106,000 for married couples) to a charitable gift annuity directly from an IRA and apply the gift toward your required minimum distributions (RMDs) for the year.

How it works

To take advantage of a charitable gift annuity, you donate cash, stock or other assets to one or more qualified charities in exchange for a guaranteed fixed income stream for life. You’ll enjoy an immediate tax deduction (subject to IRS limits) equal to the amount of your donation minus the present value of the annuity.

Typically, annuity rates are based on rates suggested by the American Council on Gift Annuities (ACGA). For example, in 2024, the ACGA recommends a rate of 5.2% for a 60-year-old recipient, 6.3% for a 70-year-old recipient and 8.1% for an 80-year-old recipient. Lower rates apply if you designate two recipients, such as you and your spouse, as joint-and-survivor annuitants. These rates are typically lower than rates on commercial annuities because charitable gift annuities are designed to preserve a significant portion of your donation for the charity.

For income tax purposes, annuity payments generally are treated as a combination of ordinary income and tax-free return of principal. If you donate appreciated property in exchange for the annuity, a portion of the payments will be taxed as capital gains.

Donating funds from an IRA

If you’re 70½ or older, you’re currently permitted to make qualified charitable distributions (QCDs), up to an inflation-adjusted $100,000 per year, directly from an IRA to a qualified public charity. For 2024, the limit is $105,000. QCDs aren’t tax deductible, but unlike other IRA distributions they’re not included in your adjusted gross income, resulting in significant tax savings. Plus, QCDs apply toward any RMDs for the year.

Now, under the SECURE 2.0 Act, you can transfer a portion ($53,000 in 2024) of your annual QCD limit to a charitable gift annuity. In addition to current tax savings, these annuities can generate a significant income stream for life (taxable as ordinary income).

But there are a couple of caveats: Unlike regular QCDs, which can be done once a year, transfers from an IRA to a charitable gift annuity are a once-in-a-lifetime proposition. Although you can split the $53,000 limit among several charitable gift annuities in a single tax year, any portion of the limit left unused at the end of the year is lost. Also, these annuities are required to pay out at a rate of at least 5%. That’s currently not a problem unless you’re under age 59, because the ACGA’s recommended rates for anyone who’s older than 58 are above 5%. But it could create issues in the future if the recommended rates fall below that threshold.

Evaluate charities carefully

Charitable gift annuities — whether funded by an IRA or other assets — can be an effective tool for satisfying your charitable goals while providing financial benefits for you (and your spouse if you’re married). Keep in mind, however, that the promise of lifetime income is only as good as the financial strength and stability of the charitable organization backing it up. So be sure to do your due diligence on the charities obligated to make the annuity payments.

© 2024

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