Unlocking the Power of Your IRA: A New Retirement Tax Break that Offers Regular Income & Supports Charitable Giving

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If you're a retiree searching for a way to supplement your income while also making a positive impact on your favorite charity or alma mater, there's a new opportunity you might not have heard of. As part of the recent retirement law changes made by Congress, retirees aged 70½ or older are now allowed to donate up to $50,000 from their Individual Retirement Accounts (IRAs) to fund gift annuities, potentially generating an annual income of up to 9.7%, depending on your age.

These new laws were implemented at a time when the wealthiest generation in history is beginning to retire, a generation that has a significant portion of its wealth tucked away in retirement accounts. Charitable gift annuities aren't a new concept, but prior to these changes, donations couldn't be made directly from retirement accounts.SourceMoneyGuru-https://www.mgkx.com/4876.html

Unlocking the Power of Your IRA: A New Retirement Tax Break that Offers Regular Income & Supports Charitable GivingSourceMoneyGuru-https://www.mgkx.com/4876.html

The Benefits of Charitable Gift Annuities

Charitable gift annuities offer a win-win scenario for both the giver and the receiver. The donors not only support their chosen charities or alma maters, but they also receive a fixed annual income from their donation. This strategy has found favor among a wide variety of charitable organizations, from small liberal arts colleges to large charities such as the American Red Cross and Salvation Army.SourceMoneyGuru-https://www.mgkx.com/4876.html

A prime example is Catherine Ribnick, a retired Federal Deposit Insurance Corp. lawyer. Catherine used the new law to make a substantial gift to her alma mater, Smith College. By setting up a second gift annuity with $25,000 from her IRA, she secured a fixed payout rate of 7%, providing her with an annual income of $1,750 for life. This move also helped to lessen her tax burden from the required minimum distributions (RMDs) from her IRA in 2023.SourceMoneyGuru-https://www.mgkx.com/4876.html

What's more, these donations are counted toward the donor's required minimum distributions, an annual withdrawal that older Americans must make from their retirement accounts. Normally, these withdrawals are taxed as income, but when directed to a charity, they are tax-free.SourceMoneyGuru-https://www.mgkx.com/4876.html

Expanding the Scope of Charitable Giving

About 1,600 charities run gift annuity programs, holding a market value exceeding $4.4 billion, as estimated by Bryan Clontz, a charitable-giving consultant. Meanwhile, Americans hold $11.5 trillion in IRAs, a substantial portion of their overall financial assets, according to the Investment Company Institute.SourceMoneyGuru-https://www.mgkx.com/4876.html

With the new law in place, the combination of IRA qualified charitable distributions with gift annuities is now possible. However, there are a few key questions that retirees must consider before opting for an IRA-funded charitable gift annuity:SourceMoneyGuru-https://www.mgkx.com/4876.html

1. What are the tax benefits of an IRA-funded charitable gift annuity?SourceMoneyGuru-https://www.mgkx.com/4876.html

The withdrawal from your IRA won't count as income and can go toward meeting any required minimum distribution for the year. The IRA owner is guaranteed a minimum payout of 5% annually, taxed as ordinary income.SourceMoneyGuru-https://www.mgkx.com/4876.html

2. Are there restrictions on the donations?SourceMoneyGuru-https://www.mgkx.com/4876.html

Yes, there are special rules. A donor can make the gift in one tax year only, either as one $50,000 gift or several smaller gifts up to the $50,000 limit. This amount counts toward a separate $100,000 limit per taxpayer for outright gifts to charity made with IRA dollars. The annuity can make payments to the donor or the donor and spouse only, and these payments must start within a year of funding.SourceMoneyGuru-https://www.mgkx.com/4876.html

3. How safe is a gift annuity?SourceMoneyGuru-https://www.mgkx.com/4876.html

A gift annuity is as safe as the charity itself. When a charity issues a gift annuity, it pledges its assets to back it. Regardless of how long you live, the charity is obliged to make payments.SourceMoneyGuru-https://www.mgkx.com/4876.html

4. Can you shop around for the best rate?SourceMoneyGuru-https://www.mgkx.com/4876.html

Yes, you can. Most charities use the American Council on Gift Annuities (ACGA) suggested payout rates, which were adjusted higher twice in the previous year. These rates anticipate a 50-50 split, with the charity receiving half of the initial donation amount upon the donor's death. However, actual results show close to 70% going to charity, according to the ACGA.SourceMoneyGuru-https://www.mgkx.com/4876.html

Making the Most of the New Law

The example of Carlos Garcia, a 71-year-old retiree from Palm Desert, California, shows how to maximize the benefits of this new law. Garcia, along with his husband, Wallace Colvard, set up a $50,000 IRA-funded gift annuity for their joint lifetimes at Garcia’s alma mater, Pomona College. They now receive $616.68 a month until the last survivor passes. In Garcia's words, “It’s a very convenient and self-serving way to do something good.”SourceMoneyGuru-https://www.mgkx.com/4876.html

Charities have been pushing for decades to make it easier for taxpayers to donate IRA dollars. In 2006, Congress enacted a law allowing direct transfers, known as qualified charitable distributions, from IRAs to most public charities. This law became a permanent part of the tax code in 2015 and has since been widely used for its tax benefits.SourceMoneyGuru-https://www.mgkx.com/4876.html


In a nutshell, the new law allowing the funding of gift annuities from IRAs is a welcome development for retirees. Not only does it enable them to make significant contributions to causes they care about, but it also provides them with a fixed annual income. This innovative approach to retirement funding is a practical strategy for those who wish to maximize the financial advantages of their IRA, while also making a meaningful difference through charitable giving.SourceMoneyGuru-https://www.mgkx.com/4876.html

Before taking any action, it's essential to consult with a financial advisor to understand how these changes can impact your personal financial situation and to navigate the rules and regulations effectively. In the end, the goal is not just about wealth preservation, but also about creating a lasting legacy that goes beyond one's lifetime.SourceMoneyGuru-https://www.mgkx.com/4876.html SourceMoneyGuru-https://www.mgkx.com/4876.html




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