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ON DEC. 23, 2022, while Santa and his elves were busy loading his red sleigh with gifts, the 117th Congress was putting together some goodies of its own, formally known as the Consolidated Appropriations Act, 2023. Before we rang in the new year, President Biden signed the bill into law.
Included in that 1,600-page, $1.7 trillion appropriations measure was a special present for folks like me—the so-called Legacy IRA. This allows me to increase the sum I give to charity and the money I earn on my fixed-income investments, while lowering the income tax I pay. Kind of like having my cake and eating it, too.
You might also benefit from this new provision. If you’re age 70½ or older, you can make a once-in-a-lifetime tax-free rollover of up to $50,000 from your traditional IRA to fund a charitable gift annuity (CGA). That $50,000 rollover doesn’t count as taxable income—but it will count toward your required minimum distribution, a must-do for those age 73 and older. You’ll receive fixed monthly, quarterly or annual payments for life based on your age. In most cases, the payout is set by the American Council on Gift Annuities. Income can be payable for life to just you or just your spouse, or to both of you.
Over many years and careers, I funded several tax-deferred retirement accounts—a traditional IRA, plus various employer plans. I lived frugally and kept adding money to these accounts until I retired at age 72. That’s when I merged them all, except a Roth IRA and an inherited IRA, into my traditional IRA. Today, most of my living expenses are covered by Social Security, a small pension and other investments. I withdraw only the required minimum distribution each year from my IRA, which—for 2023—will be almost $63,000. Ordinary income tax is due on that money, which kicks me into a higher tax bracket.
But thanks to my new Legacy IRA, I won’t owe tax on much of my 2023 required minimum distribution. That’s because I can roll over the lifetime maximum of $50,000 from my IRA to a CGA and thus I’ll only owe tax on the remaining $13,000 of my $63,000 required distribution. The CGA will pay me a stable, guaranteed income for the rest of my life. The amount is age-based. At age 76, my fixed rate is an attractive 6.8%. If I were to choose my almost 75-year-old husband as the income recipient, his rate would be 6.6%. If I wanted the payments to continue until the second of us died, our joint rate would fall to 5.9%.
CGAs are available from large, well-known nonprofits, including community foundations, universities, religious groups, human rights advocates, cultural organizations, and charities focused on medical research, animal rights and environmental concerns. Some causes you believe in are probably on this list.
When you fund a gift annuity, your contribution will be invested in a pooled reserve account along with money backing other donors’ gift annuities. The payment amount you receive each year is set and depends on how old you are at the time of your donation. After your death, money left in your CGA will be given to the charity or charities of your choice, either as an endowed gift that will last forever or as an outright cash gift.
Intrigued? Here are the steps I took to set up my Legacy IRA:
What’s the catch? It’s a one-time-only option. You can only use this Legacy IRA option in one calendar year, the funds must come from your IRA and you can’t contribute more than $50,000. Other retirement accounts, like 401(k)s and 403(b)s, don’t qualify. Income payments can only go to you or your spouse, and payments can’t be deferred. The CGA payments you receive are taxed as ordinary income. Like other fixed-income payments, inflation will eat away at the purchasing power of the payments you receive.
What about the other almost $13,000 I’m required to withdraw from my IRA this year to fulfill my total $63,000 required minimum distribution? I plan to donate much of that money directly to several nonprofits from my IRA. Result: Most of the money I take out of my IRA this year will count as qualified charitable distributions—and won’t be taxed.
Kathleen M. Rehl is retired following a career in financial planning and an “encore career” of speaking and doing research about widows. She authored the award-winning book, Moving Forward on Your Own: A Financial Guidebook for Widows. Kathleen enjoys writing legacy poetry and stories, as well as assisting various nonprofits. You can learn more at www.KathleenRehl.com. Check out Kathleen’s earlier articles.
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How is the endowment able to send an annual check to your charities “forever”? How does that work? It almost seems impossible and unviable. Annuities will always run out because the recipient dies. But a charity, on the other hand, might never fully “die”, especially an enduring one like United Way.
After I die, the remaining money in my Legacy IRA will be added to an endowment that will give money to each of the charities I chose every year in perpetuity.
This is an interesting concept. Basically, you are trading an immediate tax reduction of $12000 for a future series of $800+ tax payments for the $3400 annual income stream. You would have to live more than 18 years before the discounted future tax payments would offset the immediate tax reduction. Since I am in a lower tax bracket, the benefit for me is somewhat reduced. However, if you combine this strategy with a $50,000 Roth conversion, assuming you can pay the tax from your taxable account, you can also reduce future RMDs and future taxes. I assume that a married couple with separate IRAs could each do this.
Yes, both spouses can create a Legacy IRA.
Questions that occur to me: 1) how does an individual determine the optimal time for them to make the CGA: between age 70.5 and 73, or after age 73? The former reduces future RMD, the latter reduces current RMD. 2) how does an individual determine whether it is more tax advantageous for them to make a CGA from qualified funds, or make a tax-deductible charitable contribution from non-qualified funds?
It all depends on the specific facts and circumstances of the individual considering a “Legacy IRA.” Some may prefer to crunch the numbers with the assistance of a trusted professional.
This is terrific information. I had heard of these gift annuities and wondered, “what’s the catch?” I found this so helpful. I’m curious if the $50,000 option is once a year or once in your lifetime. I hope Randy’s website has the answer.
Kathleen said one time only.
Yes. The current law is for just one year. Many hope that this will be extended in the future, but for the time being, it is only available for one year. Note that it’s possible to do two or more CGAs during that one year if the total doesn’t exceed $50,000.
Hi Kathleen,
Thanks for your informative article. What is the advantage of using the CGA from the Community Foundation Tampa Bay versus donating QCD monies directly to a charity’s gift annuity?
The three nonprofit remainder beneficiaries are small. They don’t offer gift annuities.
Several years ago I purchased a QLAC (qualified longevity annuity contract) one for me (from my IRAs) and one for wife (from her IRAs) that seems to have accomplished much the same outcome for us. My question can I do this CGA as well?
Yes, you can create a “Legacy IRA” rollover to a CGA. Your QLAC is completely separate.
Go here for more great information about CGAs: https://acga.memberclicks.net/new-charitable-planning-opportunities-with-retirement-plans
And, you can search by zip code.
Thanks for posting this additional information to learn more about charitable gift annuities. I’ve helped folks set up traditional CGAs for the past three decades. Indeed, my 62-year-old son receives income from a CGA set up by his grandparents when he was a young boy. They’ve been around for a long time.
Thanks for great new information and thanks for this wonderful education you are providing to your followers. Can you do some articles on Roth Conversions?
I started my professional career as a public-school teacher. You might say I’m a teacher at heart. I usually pen legacy pieces that discuss real stories related to my life. Since I haven’t done a Roth conversion yet, I’ll wait until later to write about that. Thanks for liking my writing.
Thanks for an informative topic as I’m not tax savvy! However, you do raise many questions for someone with a view outside the box, and I’ll have to address those with my tax advisor.
There are many benefits for those of us with a charitable streak, as we pay less income tax and receive a nice income payment for the rest of our lives. Yes, your tax advisor will help you crunch the numbers.
Kathleen, thanks for an interesting article on a little known topic. Great info for retirees with a charitable intent.
Yes, it really is a way to have your cake and eat it too! Glad you liked my story.
I had not heard of this option. Thank you!
Variations of the “Legacy IRA” provision had lingered in Congress for a long time, so many people were surprised when this new law was passed. Nonprofits are now starting to promote this win-win approach.
Kathleen, I agree with Steve H. Thank you. Do you know if it is ok to use money from an inherited IRA? Is this money administered by the custodian charity I chose and if they “go out of business” my $50,000 goes with them or is the charity just a sponsor and the money is elsewhere?
Just as you could do a direct qualified charitable distribution from an inherited IRA, you should be able to do a “Legacy IRA” rollover to a gift annuity from an inherited IRA. The beneficiary would have to be age 70.5 or older.
Kathleen,
Thank you for providing an excellent tutorial on a new option for IRA distributions. Clear, Concise and Very Useful information.
I’m glad you liked my story.
I must agree. Particularly with the visual likening diagram Kathleen.
Some of us are particularly, visually more enlightened, and your diagram certainly helped my understanding of the ever changing tax strategies allowed winding down.
Good. Adding visual elements helps me clarify the concepts I’m trying to explain, too.