For many, charitable giving typically means writing a check or making an online donation. But what if you could integrate your generosity into your retirement plan and generate income for yourself at the same time?

Charitable gift annuities (CGAs) provide a strategic way to support your favorite nonprofit while securing a steady income stream for yourself.

Here’s what you need to know.

What is a charitable gift annuity?

A charitable gift annuity is a contract between you and a qualified charity. You make a substantial donation—whether cash, securities, or other assets like real estate—to the charity. In return, the organization provides you with guaranteed fixed income payments for the rest of your life (and possibly the life of another beneficiary). Many colleges and nonprofits offer charitable gift annuities.

To initiate this process, you’ll need to contribute a significant upfront gift. The charity will use part of your donation to support its mission, funding the programs and initiatives you care about. The remainder is invested to generate the income that will fund your future payments.

The payout rate you receive from a charitable gift annuity is based on your age, the age of any additional beneficiaries, and current interest rates. Generally, CGA rates are lower than those of 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 suggested maximum rate for a single-life annuity is 5.2% for a 60-year-old, 6.3% for a 70-year-old, and 8.1% for an 80-year-old. Rates for two beneficiaries are typically lower than for a single annuitant.

If you don’t name a beneficiary, the agreement ends upon your death, and any remaining funds go to the charity. If you do choose a beneficiary, the remaining funds go to the charity after the beneficiary’s death.

How charitable gift annuities work

Setting up a charitable gift annuity is a relatively simple process. Here’s how to establish one:

  • Choose a qualified charity: Ensure that the charity you wish to support is a registered 501(c)(3) public charity authorized to offer CGAs. Since the success of a CGA depends on the charity’s ability to manage your donation wisely, research the organization to confirm its financial stability and history of responsible investment management.
  • Negotiate the terms: Consult with the charity’s planned giving department to discuss the details of the contract. Key terms to outline include the amount of your donation, the fixed payout rate you’ll receive, and whether you want to include a beneficiary (such as a spouse) who will continue to receive payments after your death.
  • Finalize the agreement: After agreeing on the terms, the charity will prepare a formal contract that details the rights and obligations of both parties.
  • Receive income payments: The charity will start making fixed income payments to you, typically on a quarterly basis, for the rest of your life.

Tax benefits

Charitable gift annuities offer several appealing tax benefits:

  • Immediate Tax Deduction: You can deduct a portion of your initial gift from your taxable income. This deductible amount is calculated using a formula that accounts for your age, the payout rate, and current interest rates, providing you with immediate tax relief on part of your donation.
  • Tax Advantages on Payments: When you start receiving payments from the annuity, part of each payment is considered a return of your principal contribution and is therefore tax-free. The remainder of the payment is treated as ordinary income.
  • Annual Tax Reporting: Your charity will provide a Form 1099-R each year, detailing how to report the annuity payments for income tax purposes.

How did Secure 2.0 impact charitable gift annuities?

The Secure Act 2.0, enacted in December 2022, introduces significant changes to retirement planning, including new benefits for charitable gift annuities (CGAs).

For individuals aged 70½ and older, the act permits a one-time, penalty-free transfer of funds directly from an individual retirement account (IRA) to a CGA. While this transfer won’t be tax-deductible, it will count towards your required minimum distributions (RMDs) for the year.

This provision is particularly advantageous for those whose RMDs could otherwise push them into a higher tax bracket. In 2024, you can transfer up to $53,000 from your IRA to establish a CGA.

The IRS stipulates that CGAs funded with IRA assets must start making fixed payments of at least 5 percent within one year or less of the funding date.

Fees and costs

The fees and costs for charitable gift annuities (CGAs) are generally lower compared to other types of annuities, such as variable annuities. However, it’s still essential to understand these costs before committing.

Charities may charge a one-time administrative fee to cover the setup and management of your CGA. This fee typically ranges from 1 to 2 percent of your initial gift.

Be sure to inquire about any administrative fees upfront and compare them among different charities offering CGAs. Some charities may be open to negotiating the fee, particularly for larger donations.

While the charity handles the investments that generate your income, there may be minimal fees associated with these investments, such as expense ratios. These fees are generally included in the investment itself (e.g., mutual funds or stocks) and are not separate charges you pay directly.

Pros and cons of charitable gift annuities

Charitable gift annuities (CGAs) can offer significant benefits for both you and your favorite charity, but it’s essential to carefully evaluate their pros and cons before committing.

Pros

  • Guaranteed Income for Life: CGAs provide a steady, reliable income that lasts for the rest of your life, offering financial security in retirement.
  • Tax Benefits: You can receive a partial income tax deduction on your initial donation, and the potential for tax-favored income payments can help reduce your tax burden in retirement while maximizing your contribution’s value.
  • Support a Cause You Care About: CGAs enable you to make a meaningful contribution to a charity you’re passionate about, directly aiding their mission.
  • Simplified Investment Management: The charity handles the investment and distribution of your funds, relieving you from the complexities of managing your gift.

Cons

  • Irrevocable: Once the annuity contract is signed, your funds are no longer accessible. It’s crucial to be certain that you won’t need access to your donation in the future.
  • Fixed Payout Rate: The income payments are fixed at the time of agreement and do not adjust for inflation. If rates are low, this could diminish the purchasing power of your payments over time.
  • Potential Tax Implications: Although a portion of your payments may be tax-free, the rest is considered taxable income. This should be considered in your overall tax planning.
  • Not Suitable for Everyone: CGAs may not be ideal for younger donors with longer life expectancies, as the fixed payout rate may not keep up with inflation, and payments might be smaller due to the need to last a longer period.

In Conclusion

Charitable gift annuities (CGAs) provide a distinctive opportunity to blend philanthropy with reliable income planning. However, it’s crucial to thoroughly assess your financial situation, risk tolerance, and long-term objectives before proceeding with a CGA. Consulting with a financial advisor can help ensure that a CGA fits well with your overall financial strategy.