New Tax Law Incentivizes Retirees to Make an IRA-Funded Gift That Pays Annual Income

Giving back just got easier—and more rewarding. If you’re looking for ways to lighten your income tax liability while supporting your favorite cause, retirees can now receive fixed income payments for life by donating directly from their individual retirement account (IRA) to qualified charities.

Gift annuities have been around since John Trumbull donated his paintings of the American Revolution to Yale in 1831 in exchange for annual payments of $1,000 for life. While nonprofits have offered gift annuities for years, donors could only fund them with cash, marketable securities, property, or other assets.

As a result of the Secure Act 2.0 signed into law in December 2022, eligible retirees are now allowed to fund a charitable gift annuity with a qualified charitable distribution (QCD) from their IRA. This new law triggers new opportunities for retirees who wish to defer their tax obligations, satisfy required minimum distributions, and support a charitable mission.

How It Works

Donors who are at least 70 ½ and older can make a one-time election of up to $50,000 in a single year to fund a charitable gift annuity, which counts toward the $100,000 annual limit for direct IRA distributions to 501(c)(3) charities. Smaller payments can be allocated throughout the year to reach the maximum contribution limits.

Bear in mind, the one-time election can be used to fund multiple gift annuities in more than one nonprofit, as long as the total amount does not exceed $50,000 within one year.

Married couples filing jointly can each contribute $50,000 from their respective IRAs, for a total of $100,000 in charitable gift annuities, potentially doubling the amount of total IRA charitable distributions to $200,000.

In exchange for the donation, the qualified charity(s) agrees to pay a fixed income stream for life. Payouts are a pendulum of varying rates depending on the charity and age of the donor at the time of the election. According to the American Council on Gift Annuities, suggested rates for payouts are between 5% and 9.7% of the QCD amount. Payouts are required to start within one year of funding the annuity and taxed at ordinary income.

To make the election, IRA custodians must transfer the irrevocable gift directly from the retirement account to the qualified charity. The money cannot be distributed to the account holder first and then donated.

If there are any funds left in the annuity after the donor passes away, the charity inherits all remaining assets and does not pass them down to the beneficiaries of the donor.

Tax Benefits

This new opportunity for charitable gift planning also comes with a tapestry of favorable tax treatments.

Tax-Free Distribution

Unlike regular withdrawals from a traditional IRA, the QCD is a tax-free distribution. Since the distribution is made directly to the charity of choice, donors are not required to count it as income for federal income tax purposes.

While the gift does circumvent income tax liability on the transfer, it does not qualify for an income tax deduction on the charitable contribution.

RMD Eligibility

When required minimum distributions (RMDs) kick in at age 73, the new law permits donors to count QCDs toward their required withdraws for the year. Those who may not need all or some of their RMDs for living expenses may opt to fund a charitable gift annuity, which will ease any tax burdens for the taxable year and establish an attractive, guaranteed income stream for life.

Please note that the amount treated as a QCD can only be applied against your current year RMD and you are not allowed to carryforward any excess to apply to future years’ RMD requirements.

Of note

While many nonprofits offer gift annuity programs, certain charities do not qualify for QCDs under current law, including donor-advised funds, private foundations, and supporting organizations.

If you own a Roth IRA account, some situations may allow you to use it for QCDs, but because Roths are structured to provide tax-free income on withdrawals, there’s no real tax advantage to funding a charitable gift annuity with your Roth IRA.

Next Steps

For those in or nearing retirement, an IRA-funded gift annuity may be a valuable retirement strategy to consider. Retirees can avoid the ebbs and flows in the market by eliminating investment risk and receiving fixed lifetime payouts regardless of market performance. Discuss your options with an R&A advisor to determine if this approach is best for you.

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About this Author

Dave specializes in tax research, estates and trusts, complex partnerships, and corporate, not-for-profit, and private foundation tax compliance.