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How often do you get to “have your cake and eat it too?” As a CERTIFIED FINANCIAL PLANNER ™ Practitioner, I am always on the lookout for new innovations in financial planning, or little-known changes to the tax code. If you have charitable intent, a retirement account, and are over age 70 1/2, there is a new option available to you. What if I told you that you could give to your favorite charity and receive an income stream for life? Once you turn 70 ½, each year you can gift a Qualified Charitable Distribution (QCD) of up to $100,000 to a bona fide 501(c)(3) charity. Utilizing a QCD can fulfill an individual’s Required Minimum Distribution (RMD) for that year (if they are taking RMDs) and can be a useful tool in tax planning. Thanks to the SECURE 2.0 Act, individuals can now use $50,000 of this QCD amount to make a one-time Charitable Gift Annuity (CGA). To clarify, the one-time gift of $50,000 is only available to an individual once in their lifetime. Some individuals might find that 2023 is a good year for such a gift to assist with year-end tax planning and charitable gifting.

A Charitable Gift Annuity is a contract between an individual and a charitable organization. (No insurance or annuity company need be involved.) The individual makes an irrevocable gift of a certain dollar amount up to $50,000 and in return the charity agrees to pay the individual a fixed amount on a periodic basis for life. The annuity can be single or joint-life. If the joint life option is chosen, the annuity payment remains for the surviving spouse even after the first spouse passes away. Another option is to create this gift annuity for someone other than the donor and their spouse. As long as the beneficiary of this annuity stream is at least 60 years of age, this can be accomplished.

It is important to note that the annuity is backed by the charity’s assets and stability. If the charity is not around ten years from now, for example, then the annuity payment would cease to exist. The CGA must also have an annuity rate of at least 5%, but this rate depends on the individual’s age. The older an individual is, it is likely that the annuity rate will be higher. It is noticeable that this type of annuity may not pay out as much as a traditional annuity but it is because the purpose of the CGA is to give to charity.

Lastly, it is important to mention that the annuity payments received from the CGA are taxed at ordinary income tax rates. The gift to the charity is generally tax-neutral, just as a QCD is. An individual is not taxed for this initial withdrawal out of their retirement account since it is gifted directly to a 501(c)(3) but is taxed on the annuity income received throughout their life. This can be a useful planning tool: rather than realizing this income as a lump sum in the year it is distributed (which could push an individual into a higher tax bracket) they are able to gift to a charity and receive the income throughout their lifetime, therefore spreading out the taxable income.

If you have charitable intent, a retirement account, and are at least age 70 ½, donating to a charity through a CGA could be a great option for you. It is a vehicle in which you can give to your favorite charity and also receive an income stream for life. If you would like to take advantage of this new opportunity or if you have any questions, please contact Warburton Capital and we would be happy to walk you through the process.

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