Using an IRA Charitable Gift Annuity to Make a Charitable Donation and Receive Income for Life

Tax deductions for charitable donations come in many types. Starting in 2023, as part of SECURE Act 2.0 (passed into law in late December 2022), Congress has made available a new type of charitable donation opportunity for individuals called an “IRA charitable gift annuity”.

An IRA charitable gift annuity allows older owners of traditional IRAs to donate IRA funds to a qualified charity, get some tax breaks, and receive lifetime payments in the form of an annuity.

Many qualified charities are potentially benefiting today from the fact that the “baby boomers” (who are now in their 60’s and 70’s) have contributed through much of their lives to qualified retirement plans and to traditional IRAs.

They include federal employees and retirees who have contributed to the traditional Thrift Savings Plan (TSP) and to traditional IRAs. With an IRA charitable gift annuity, they have a new way to make large donations to their favorite charitable causes and get something back in the form of lifetime income.

Millions of charitable donors have had few specific tax breaks since the passage of the Tax Cuts and Jobs Act (TCJA) of 2017 that nearly doubled the standard deductions and made itemizing on one’s federal income tax return (including charitable contributions) less tax beneficial. In fact, the passage of the TCJA has reduced the percentage of federal tax filers itemizing their deductions from about 30 percent to under 10 percent.

However, charitable gift annuities are not appropriate for every individual. Among the reasons not to purchase an IRA charitable gift annuity are:

(1) A low lifetime contribution/donation amount results in a smaller than expected monthly annuity;

(2) The higher investment growth potential if IRA fund assets are left in the IRA; and

(3) The need to vet the charity paying the annuity to make sure that annuity payments will continue.

This column presents information about charitable gift annuities including how they work, how they are taxed, what are their fees, and the risks associated with them.

What is New with Charitable Gift Annuities Starting in 2023?

Starting in 2023, charitable gift annuities can be funded with traditional IRA assets. While charitable gift annuities have long existed and are extensively offered by colleges, churches, and healthcare nonprofits, until 2023 they have been funded only with cash or appreciated assets such as stocks.

IRA charitable gift annuities are a subset of “qualified charitable distributions” (QCDs). With a QCD, a traditional IRA owner older than age 70.5 can withdraw as much as $100,000 per year from his or her IRA and donate the IRA funds to a qualified charity. While the IRA withdrawal is not taxable, the withdrawn funds donated to the charity are not tax deductible.

But the QCD is removed from the IRA balance, thus lowering the value of the IRA and lowering future IRA minimum required distributions (MRDs). IRA donations to an IRA charitable gift annuity are subtracted from the $100,000 annual limit on QCDs. Therefore, if a donor purchased a $50,000 IRA charitable gift annuity during 2023 (the maximum amount allowed for 2023), the donor has $50,000 left to make other QCDs during 2023.

How Do IRA Charitable Gift Annuities Work?

A traditional IRA owner aged 70.5 or older makes an irrevocable donation of up to $50,000 to one or more 501(c)(3) charities directly from his or her traditional IRA. The donation is a one-time only donation but can be spread over multiple charities. The $50,000 limit is adjusted for inflation. For 2024, the limit will be $53,000.

The charity then pays an annuity to the donor at a fixed interest rate set at the time of the gift. The amount of the monthly annuity payment will be based on the donor’s age and an anticipated split of funds between the donor and the charity. Annual payments are not adjusted for inflation. The payments end with the death of the donor and the donor’s spouse, depending on how the annuity is set up.

The annuity interest rate for IRA charitable gift annuities are the same rates used for other types of charitable gift annuities which are funded with non-IRA capital assets such as stocks and bonds. But the interest rates for charitable gift annuities are typically lower than for noncharitable annuities.

Interest rates vary according to the donor’s age and the charity. Many nonprofit organizations use interest rates recommended by the American Council on Gift Annuities (ACGA). Current law dictates an interest rate of at least 5 percent for these annuities.

For 2024, the ACGA has recommended an interest rate of 6.3 percent for a 70-year-old and 8.0 percent for an 80-year-old who donates to an IRA charitable gift annuity.

Taxation of IRA Charitable Gift Annuities

Annuity payments made to the IRA charitable gift annuity donor are fully taxable. As is the case with a QCD, there is no tax deduction when the lump sum payment from a traditional IRA is made to the qualifying charity.

However, unlike a standard traditional IRA withdrawal, the gift donation made using the lump sum payment is not included in the donor’s income in the year of withdrawal; therefore, the lump sum payment does not increase the donor’s adjusted gross income (AGI). This could benefit the donor as AGI is used to determine other taxes such as the net investment income tax (NITT) and Medicare Part B monthly premiums.

Also, the donation to a charitable gift annuity can also offset all or part of the traditional IRA’s annual IRA required minimum distribution if the donor has reached his or her required beginning date for taking IRA minimum required distributions (MRDs) (age 73 starting January 1, 2024).

Donation Limits for Married Couples

The limit for donating to an IRA charitable gift annuity is per IRA owner. That means with a married couple, if both spouses own a traditional IRA, then each spouse can use up to $50,000 (2023) ($53,000 during 2024) of his or her traditional IRA for donating to an IRA charitable gift annuity. An annuity can also be set up so that payments end with the death of the second spouse. In that case, monthly payments will be lower.

Fees and Risks Associated with IRA Charitable Gift Annuities

The ACGA’s recommends an annual management fee of 1 percent of the amount paid by the charity. This can vary by charity. Potential donors should be sure to ask about fees and other costs associated with the gift annuity.

A charity is responsible for making sure that annuity payments are made. If the charity is financially suffering, then the gift annuity donor could receive less monthly income. Unfortunately, over the years there have been a few scandals associated with charitable gift annuities. It is therefore important for a potential donor to check out a charity’s financial stability and whether state regulations offer protection.

Potential Disadvantages of an IRA Charitable Gift Annuity

The potential disadvantages associated with an IRA charitable gift annuity include:

• Donating irrevocably with traditional IRA funds to create the annuity

• Annuity payments are fixed and are not adjusted for inflation

• Annuity payments are fully subject to federal and state income taxes, and

• Annuity payments may be lower than with a non-charitable annuity (such as a fixed annuity offered by a private insurance company) because the primary purpose of the charitable gift annuity is to benefit the charity.

Federal employees and retirees who may be interested investing in an IRA charitable gift annuity are encouraged to check with their financial and tax advisors before they decide to invest. They should make sure that an IRA charitable gift annuity is suitable given the retiree’s future estate and income planning goals and needs.