Like many legal, tax, and financial professionals, I pay close attention to what happens in Congress at the end of the year. Sometimes, they squeeze a tiny new tax provision into larger bills. At the end of 2022, that’s precisely what happened. And the new tax law is good news for IRA owners.
For the first time, IRA owners aged 70½ can now make a tax-free distribution (up to $50,000) direct from an IRA into a charitable gift annuity (CGA).
A CGA is a simple contract between you and a public charity, such as Indiana University. It is funded with an irrevocable gift and, in return, the charity pays you a stream of fixed income for life. When the CGA terminates, the charity uses the assets remaining in the CGA to continue its charitable mission.
Before 2023, any IRA distribution into a CGA was taxable—sometimes at a tax rate as high as 37 percent. Ouch! For older retirees, unfortunately, that IRA distribution wouldn’t help satisfy the IRS’s required minimum distribution (RMD).
It was common for donors to walk away from funding a CGA when they learned of these unfavorable restrictions. However, this new tax law changes all that.
Now, someone who is 70½ can fund a CGA by making a tax-free distribution (up to $50,000) direct from an IRA. Fortunately, this distribution is not taxable income and counts toward satisfying your annual RMD. In addition, if an IRA owner’s spouse owns a separate IRA, the spouse can also make a tax-free distribution into the same CGA—doubling its size.
Recall that the primary benefit of funding a CGA is that it provides you with a stable, fixed income stream for life, regardless of fluctuations in the financial markets. For folks wanting to fund a CGA with non-IRA assets (i.e., cash or marketable securities), the additional benefit is that you generate a meaningful charitable income tax deduction, even if you are not over age 70½.
That makes funding a CGA in 2023 a good idea.
CGA payout rates increased at the start of the year and are now at the highest level in over a decade. An example: If you are age 75, your payout rate is now 6.6 percent, up from 6 percent last year. For a $50,000 gift direct from your IRA, you would now receive $3,300 annually for life instead of $3,000. Over 15 years, this higher payout rate will provide you with an extra $4,500.
It would take another couple pages to fully expound on the finer details of IRA distributions and the mechanics of a CGA. But this is the big picture of how IRA owners can benefit from this new law. If you wish to explore a gift annuity, whether it’s funded direct from your IRA or with non-IRA assets, please contact me. I’d be happy to talk with you and your legal and tax advisors.