Want to Make an Impact?—A Win-Win: Using Retirement Funds to Support Your Favorite Cause
Want to Make an Impact?—A Win-Win: Using Retirement Funds to Support Your Favorite Cause
Introduction
In December 2022, Congress passed the Secure 2.0 Act of 2022 (the “Act”). Included in the Act is a provision that allows certain individuals to make a one-time transfer of up to $50,000 directly from an IRA to a charity in the form of a charitable gift annuity.
How the Act Works
Effective January 1, 2023, retirees age 70½ and older are able to donate up to $50,000 directly from their IRAs to a charity in the form of a gift annuity. The amount donated counts towards a separate $100,000 annual limit per taxpayer for outright gifts to charity from an IRA or retirement plan. The gift also counts towards the donor’s Required Minimum Distribution for the year. Normally these withdrawals are taxed as ordinary income, but when directed to a charity the withdrawal is tax-free. In exchange for the gift, the charity invests the funds and agrees to make fixed annual payments to the donor until their death. These annual annuity payments are taxed as ordinary income to the donor.
The gift can only be made in one taxable year. Thus, a retiree can make either a one-time $50,000 gift, or a one-time smaller gift below the $50,000 limit. For a married couple, each spouse can donate up to $50,000 in exchange for a joint-life annuity. Thus, a married couple can collectively make a $100,000 donation, with the full amount of the associated annuity payments continuing until the second of them dies.
Annuity Payment Structure
The American Council on Gift Annuities provides the following suggested payout rates, which vary depending on the age of the donor:
| Age | Annual Payout Rate | Annual Payout for a $50,000 Donation |
| 70½ years old | 5.9% | $2,950 |
| 75 years old | 6.6% | $3,450 |
| 80 years old | 7.6% | $3,800 |
| 85 years old | 8.7% | $4,350 |
| 90+ years old | 9.7% | $4,850 |
The Potential Benefits to Retirees Wanting to Make a Donation
The Act allows retirees who want to support their alma mater or favorite charity an opportunity to do so without losing much, if any, valuable retirement income. Making a $50,000 tax-free one-time distribution reduces the amount of the future annual minimum distributions the retiree is required to take from their IRA. This reduction in annual IRA income is, for the most part, offset by the annual fixed payments received from the charity. Thus, a retiree can make a large one-time donation from their retirement account without incurring the associated reduction in their annual retirement income.
The Act also allows retirees to gain peace of mind by neutralizing some of the risk that comes along with the recent high level of stock market volatility. Establishing a fixed annuity stream helps insure against the risk of a reduction in retirement income due to a market downturn. However, eliminating downside market risk comes at the expense of eliminating upside market potential, and retirees should not expect to recoup the full amount of their donation. Therefore, it is important that the retiree does not need to rely on the foregone principal or the forgone potential upside market return to meet their retirement needs.
Estate Planning Considerations
Additionally, for retirees who have large amounts of their estate held in IRAs, it is generally better to make a donation from an IRA account than from other available funds. It is generally better for individual beneficiaries to inherit non-retirement assets. Individual beneficiaries do not receive inherited retirement assets outright with a stepped-up basis as they do with other inherited assets. Rather, inherited retirement assets remain in retirement accounts, and a non-spouse beneficiary is generally required to withdraw the full account balance within 10 years. These withdrawals are taxed as ordinary income to the beneficiary.
Summary
Americans are holding an ever-increasing percentage of their overall financial assets in retirement plans, which may limit their ability to give to charity during their lifetimes. The Act allows the average retiree the ability to make a greater impact on their favorite charity than they otherwise could have by reducing the effect the donation has on their retirement income. In turn, charities and colleges seeking donations gain a new tool to incentivize a large one-time donation from existing donors and the ability to tap into a new pool of potential donors.
(Authored By: Caroline Sutherland (K&D Summer Law Clerk) & Joseph T. Kenney, J.D., LL.M., CPA)