Many individuals are familiar, at least somewhat, with the ability to take some (or all) of their required minimum distribution (RMD) from an individual retirement account (IRA) and donate it to a qualified nonprofit organization. This process, known as making a qualified charitable distribution (QCD), eliminates the need to report the RMD as taxable income; this can be a way to avoid having the RMD increase taxable income and popping the taxpayer into a higher tax bracket. Conversely, if the RMD that is directed to charity does not have to be counted as income, the amount donated to charity does not qualify for a charitable donation. While the lack of a charitable deduction may give some people pause, overall it can be a more cost-effective way to donate to a nonprofit organization. This is a good strategy to meet someone's commitments to fund nonprofit organizations, while keeping the IRA distribution off of an individual's income tax return. A taxpayer is able to make a QCD if the taxpayer is 70 1/2 years old as of January 1, 2023. Just to mention it, a donor advised fund is not a permitted recipient for a QCD. The annual limit on the amount of a QCD in 2023 is $100,000 per taxpayer (a spouse will have an additional $100,000 QCD limit). The annual $100,000 limit will increase in future years, as it is indexed for inflation, beginning in 2024.
Beginning with 2023, there is another new strategy available that has not received much attention. In this riff on the above qualified charitable distribution, an individual can make a donation to a gift annuity to fund a nonprofit (known as a charitable gift annuity), and the individual will receive an annuity of a fixed amount each year in return, either over a fixed number of years or over the donor's life (and even over the donor's spouse's life).
First, a little background information on RMDs. Every taxpayer who has a traditional IRA (an IRA that is not a Roth IRA) is required to take a minimum distribution upon reaching a prescribed age. The purpose of this is to avoid a massive building up of IRA values and to trigger the need to pay taxes on an annual basis on a certain amount of retirement income. The prescribed date when distributions were required was when a taxpayer turned 70 1/2 years old. Recently, that age was bumped up to age 73 if you reach age 72 after Dec. 31, 2022. If a taxpayer turns age 74 after December 31, 2032, the new RMD age will be 75 (but don't hold your breath on something that far into the future).
Returning to the discussion of giving an RMD to charity, it should be noted that this should probably only be considered by those who have planned out their retirements from a financial perspective and who have determined that they have adequate resources to fund their lifestyles and meet their needs, and still have funds available to donate to charity. While the gift to charity of an RMD from an IRA can be outright with no strings attached, as noted in the first paragraph above, some taxpayers may take a little comfort by making the gift and also retaining an income stream. The total amount that can be donated by an individual to a charitable gift annuity to benefit a nonprofit in a tax year (and in a lifetime) is limited to $50,000 (a spouse has a separate $50,000 limit). These income streams that are paid by the nonprofits to the donors under these arrangements will depend on tables produced by the IRS and will be dependent on a taxpayer's age. At the taxpayer's death, any amounts remaining will go to the charity. While in many cases the income stream will not be large - perhaps in the range of 5% to 6% - the retained income stream might provide that extra bit of comfort that is needed by the donor. It should be noted, however, that the payout rates increase based on the age of the donor at the time the annuity is funded.
The annuity must be funded exclusively by QCDs and must commence with fixed payments of 5% or greater not later than one year from the date of funding. The value of the annuity and the remainder interest is determined under IRS interest rates and actuarial tables. Only the individual and his or her spouse may receive the annuity distributions and the distributions are not assignable. It should also be kept in mind that depending on the amount of the individual's investment income from all sources, the annuity payments may be subject to the 3.8% net investment income tax, whereas the RMDs that are taken into income by an individual are not subject to the net investment income tax.
Not all charities are set up to offer this option to their donors, but it should be expected that this option will become more widespread in the months and years ahead. If you are age 70 1/2 in 2023, inclined for charitable giving, and have adequate financial resources to last your lifetime, consider contacting your favorite nonprofit to see if they can accommodate a charitable gift annuity.
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