All You Need to Know about Charitable Gift Annuity

For many people, charitable giving typically involves writing a check or donating online. But what if you could integrate your generosity into your retirement plan while also generating income for yourself?

Charitable gift annuities (CGAs) provide a strategic way to support your favorite nonprofit and secure a guaranteed income stream for yourself.

Here’s what you need to know.

A charitable gift annuity (CGA) is a contractual agreement between you and a qualified charity. Essentially, you donate a lump sum of cash, securities, or other assets like real estate to the charity. In return, the nonprofit guarantees fixed income payments for the rest of your life (and potentially for the life of another beneficiary). Many colleges and nonprofit organizations offer CGAs.

To start the process, you make a substantial upfront gift, and the charity divides your contribution. A portion is allocated directly to support the programs and initiatives you care about. The remaining portion is invested to generate the income that will fund your future payouts.

The payout rate you receive from the annuity is based on your age, the age of any additional beneficiaries, and current interest rates. Keep in mind that CGA rates are generally lower than traditional retirement annuities offered by life insurance companies.

Many nonprofits use rates recommended by the American Council on Gift Annuities. As of January 2024, the single-life suggested maximum gift annuity rate is 5.2 percent for a 60-year-old, 6.3 percent for a 70-year-old, and 8.1 percent for an 80-year-old. The rate for two people is always lower than for a single annuitant.

If you don’t name a beneficiary, the CGA agreement ends when you pass away, and the remaining funds stay with the charity. Similarly, if you select a beneficiary, any remaining funds go to the charity after the beneficiary dies.

Setting up a charitable gift annuity (CGA) is a relatively straightforward process. Here’s how to establish one:

  • Choose a Qualified Charity: Ensure the charity you want to support is a registered 501(c)(3) public charity authorized to offer CGAs. Research the organization to verify it is financially sound with a proven track record of responsible investment management, as the nonprofit’s ability to invest your money wisely is crucial.
  • Negotiate the Terms: Discuss the details of the contract with the charity’s planned giving department. Outline key terms, including the amount of your donation, the fixed payout rate you’ll receive, and whether you wish to include a beneficiary (typically a spouse) who will continue receiving payments after you pass away.
  • Finalize the Agreement: Once the terms are agreed upon, the charity will draw up a formal contract outlining the rights and obligations of both parties.
  • Receive Income Payments: The charity will begin making fixed income payments to you, usually quarterly, for the rest of your life.

Charitable gift annuities (CGAs) provide several attractive tax benefits for donors:

  • Immediate Tax Deduction: You can deduct a portion of your initial gift from your taxable income. The deductible amount is calculated using a complex formula that considers your age, the payout rate, and current interest rates, providing you with immediate tax relief.
  • Tax Benefits on Annuity Payments: When you start receiving income from the CGA, a portion of each payment is considered a return of your principal contribution and is not taxed. The remaining portion is treated as ordinary income, which can lead to significant tax savings.

Each year, your chosen charity will send you a Form 1099-R detailing how the annuity payments should be reported for income tax purposes.

The Secure Act 2.0, signed into law in December 2022, includes provisions that enhance the appeal of charitable gift annuities (CGAs) for older philanthropists.

One significant provision allows individuals aged 70½ and older to make a one-time, penalty-free transfer of funds directly from an individual retirement account (IRA) to a CGA. Although this transfer isn’t tax-deductible, it counts toward the required minimum distributions (RMDs) for the year. This can be especially beneficial for those whose RMDs would otherwise push them into a higher tax bracket. In 2024, you can contribute up to $53,000 from your IRA to establish a CGA.

According to the IRS, charitable gift annuities funded with an IRA must begin making fixed payments of 5 percent or more within one year of the funding date.

Charitable gift annuities (CGAs) generally come with minimal fees and costs, offering a refreshing contrast to other types of annuities, like variable annuities. However, it’s crucial to understand these expenses before committing to an agreement.

Some charities may impose a one-time administrative fee to cover the costs of setting up and managing your CGA. This fee typically ranges from 1 to 2 percent of your initial gift amount.

Be sure to inquire about any administrative fees upfront and compare them across different charities offering CGAs. Larger contributions might even make it possible to negotiate these fees.

While the charity manages the investments that generate your income stream, there may be minimal fees associated with these investments, such as expense ratios. These fees are usually embedded within the investments themselves (like mutual funds and stocks) and are not separate charges you pay directly.

Charitable gift annuities are frequently touted as a win-win for both you and your favorite charity. However, it’s essential to weigh the pros and cons carefully before proceeding.

  • Guaranteed Income for Life: One of the most appealing aspects of CGAs is that they provide a reliable and predictable source of income that you cannot outlive. This feature is particularly beneficial for those seeking financial security in retirement.
  • Tax Benefits: CGAs offer significant tax advantages, including a partial income tax deduction on your initial gift and potential tax-favored income payments. These benefits can help reduce your tax burden in retirement while maximizing the overall value of your contribution.
  • Support a Cause You Believe In: By setting up a CGA, you can make a substantial contribution to a charity you’re passionate about, directly supporting their mission and work.
  • Reduces the Burden of Managing Investments: With CGAs, the charity takes on the responsibility of investing and distributing your funds, freeing you from the financial complexities and management associated with your gift.
  • Irrevocable: Once you sign the annuity contract, your funds are no longer accessible. The inability to access your donated principal after finalizing the agreement is a significant drawback. Therefore, it’s crucial to ensure that you won’t need access to your lump-sum donation in the future.
  • Fixed Payout Rate: The income payments you receive from the charity are locked in at the time the agreement is signed and do not adjust for inflation. While interest rates might currently be high, locking in a fixed rate can erode the purchasing power of your income stream over time as living costs rise.
  • Potential Tax Implications: Although a portion of your income payments is generally tax-free, the remaining portion is considered taxable income. It’s important to factor this into your overall tax planning strategy.
  • Not Suitable for Everyone: CGAs might not be ideal for younger donors with a long life expectancy. The fixed payout rate may not keep pace with inflation over time, and since the payments need to last longer, the amount you receive will be lower.

While charitable gift annuities present a distinctive opportunity to merge philanthropy with secure income planning, it’s crucial to assess your financial circumstances, risk tolerance, and long-term objectives thoroughly before opting for a CGA. Consulting with a financial advisor can help ensure that a CGA aligns seamlessly with your overarching financial strategy.