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Better Than Cake

Kathleen M. Rehl

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:

  • I identified charitable organizations to receive monetary gifts from my CGA after my death. I named two religious congregations and an international organization that benefits widowed persons.
  • I chose a nonprofit to administer my gift annuity and signed its one-page CGA agreement. I decided on my local Community Foundation Tampa Bay. There was no expense involved in doing this.

  • I made a tax-free $50,000 qualified charitable distribution, or QCD, from my Vanguard Group traditional IRA directly to the Community Foundation Tampa Bay. That’ll save me $12,000 in federal income tax this year. (I’m in the 24% marginal tax rate, so $50,000 x 24% = $12,000.) Since this distribution isn’t counted as taxable income, it helps lower my Medicare surcharge known as the IRMAA, short for income-related monthly adjustment amount. The exclusion also allows me to avoid the 3.8% surtax on my net investment income.
  • I’ll receive an immediate annual income of $3,400 based on my age. This will be paid quarterly. That’s a stable, guaranteed lifetime fixed income of 6.8% every year, regardless of market fluctuations. That income rate is better than that on certificates of deposit or government bonds—though, of course, annuity buyers don’t get their principal back. Set-up costs are non-existent or minimal at most. It’s a win-win situation where you can help your favorite nonprofit and boost your retirement income at the same time.
  • The remaining CGA balance at my death will create the “Kathleen Moore Rehl Legacy Fund Endowment” that will send an annual check to all three of my charities of choice forever. This is a terrific way for me to give a gift every year to nonprofits I care about after I’m gone.

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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