By Laura Saunders
Dec. 1, 2023
Tax breaks for charitable donations come in many flavors, and this year Congress has a new one for seniors called an IRA charitable gift annuity. It allows older owners of traditional IRAs to donate account funds to a charity and get tax breaks plus income payments for life.
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Brian and Deborah Smith of Park City, Utah, plan to try this option next year. That’s when Deborah Smith turns 73 and has to begin required withdrawals from her traditional IRA. She will donate $53,000 of her $550,000 account to the Episcopal church where the couple is active and Deborah serves on the board.
In return, says Brian Smith, the annuity will pay his wife about $300 a month during her life, based on a 7% rate. This will provide a nice boost to her Social Security payments. Because Deborah’s required withdrawal from her IRA will be used for a charitable donation, the payout won’t raise their taxable income for 2024. The donation also will help damp the income-related charges for Medicare premiums known as Irmaa.
Brian, a professional investor, says he and his wife live mainly on investment income, and he suspects the annuity’s fixed rate will look even better in several years.
“Making this big donation to the church while we’re alive feels good, and getting a monthly payment back feels good too,” he says. “It’s a win/win.”
For charities, a big advantage is that baby boomers holding lots of assets in traditional IRAs have a new way to make large donations and get something back. Millions of these givers have had few or no specific tax breaks for donations since the 2017 tax overhaul nearly doubled the standard deduction, which has reduced the percentage of filers itemizing from about 30% to under 10%.
But these donations are not for everyone. “I don’t see too many of our clients doing it,” says Dan Griffith, who directs strategies for high-net worth clients at The Huntington Private Bank in Columbus, Ohio.
Among other things, he points to the low lifetime limit for the donations, the higher growth potential for assets left in the account, and the need to vet the payer.
With pitches for IRA gift annuities coming thick and fast as year-end approaches, donors will want to consider all the angles. Here’s more to know.
What’s new about IRA charitable gift annuities?
The ability to use IRA assets to do them. While charitable gift annuities have long existed and are widely offered by colleges, churches and healthcare nonprofits, typically they have been funded with cash or appreciated assets like stock.
In essence, IRA gift annuities are a subset of qualified charitable distributions. Many rules are the same, and these donations are subtracted from the total annual limit for QCDs. So if a donor does a $50,000 IRA gift annuity this year, he or she has $50,000 left for other QCDs.
How do these annuities work?
IRA owners age 70 ½ or older make irrevocable donations of up to $50,000 to one or more 501(c)(3) charities directly from their account. The limit is adjusted for inflation, and in 2024 it will be $53,000.
Under current law, IRA gift annuities can only be done once in a donor’s lifetime—although the giver can split the total among several nonprofits in that year.
The charity then pays an annuity at a fixed rate set at the time of the gift. It is based on the donor’s age and an anticipated 50/50 split of funds between the donor and the charity. The payments aren’t adjusted for inflation, and they end with the death of the owner or the owner and spouse, depending on the annuity’s setup.
What are the rates?
They are the same rates as for other charitable gift annuities, which are typically lower than for noncharitable annuities.
Rates vary according to the recipient’s age and the charity, but many nonprofits use rates recommended by the American Council on Gift Annuities. The law mandates a rate of at least 5% for these annuities.
For 2024 the ACGA’s recommended rates are expected to be 6.3% for a 70-year-old and 8% for an 80-year-old, about 0.4 percentage point higher than for this year.
How are IRA charitable gift annuities taxed?
IRA gift-annuity payments to the donor are taxable at ordinary income rates.
As with QCDs, there is no tax deduction for the donation. But unlike a standard IRA withdrawal, the gift doesn’t raise adjusted gross income. AGI is used to determine some other taxes and the Medicare premiums known as Irmaa.
The IRA donation also offsets part or all of the account owner’s annual minimum withdrawal for that year, if one is required.
How does the donation limit apply to married couples?
The limit is per IRA owner. If each spouse has a traditional IRA, then each can use up to $50,000 of his or her account funds this year for an IRA gift annuity, for a total of $100,000 per couple.
In addition, an annuity can be set up so that payments end with the death of the second spouse. In that case, the payments will be lower.
What are the fees and risks?
According to ACGA President Joe Bull, the group’s recommended rates assume an annual management fee of 1% paid by the charity, although arrangements vary. Be sure to ask about fees and other costs.
Charities usually bear the burden of making sure the annuity is paid—so recipients can suffer if the charity does, and there have been a few scandals. Check the group’s stability, and whether state regulations offer protections.
Sometimes the annuity recipient lives much longer than expected. In this case, the charity may ask the recipient to forgo further payments, although the donor can refuse. This request is less likely if other donations are expected from that giver.
What are the rules on receiving goods and services from the charity for donors with these annuities?
Don’t take the freebies! The rules aren’t the same as for other charitable donations. With those, a free ticket to a gala worth $250 can simply be subtracted from the contribution.
But not for QCDs, which include IRA gift annuities. Instead, the free gala ticket worth $250 would likely disqualify the tax-free IRA donation. The IRS might not find out, of course, but it’s not worth the risk.
Write to Laura Saunders at Laura.Saunders@wsj.com
Dow Jones & Company, Inc.
