Giving Back While Reducing Your Tax Burden

The power of using a QCD to establish a charitable gift annuity

President Biden recently signed into law the Secure Act 2.0. Among other things, this new law allows taxpayers to establish a charitable gift annuity with a qualified charitable distribution (QCD) from their individual retirement account (IRA), starting in 2023.

With a charitable gift annuity, a donor makes a gift to a public charity (like Duke!) in exchange for a fixed, lifetime payment. While taxpayers have established gift annuities with gifts of cash or stock for many years, the ability to establish a gift annuity with a transfer from an IRA is new.

The benefits of using a QCD to establish a charitable gift annuity include:

  • If you are 73 or older, your QCD contribution will count toward your annual required minimum distribution (RMD) from your IRA in the applicable year. (Note that the amount of a QCD that counts toward your RMD may be reduced by additions to a retirement account made after age 70½).
  • You will receive the security of a fixed income from a Duke gift annuity for your lifetime and/or the lifetime of your spouse.
  • You will provide future support for Duke. You may direct your gift annuity to the area of Duke that is most important to you.

To establish a charitable gift annuity using a QCD from your IRA:

  • You must be at least 70 ½ years of age at the time of the transfer and the transfer must be from a traditional IRA, not a 401(k), 403(b), etc.
  • The annuity can only benefit you and/or your spouse, and payments must start within 1 year of the gift.
  • There is an aggregate limit of $50,000 per taxpayer. A married couple can each contribute $50,000 from their respective IRAs, for a total of $100,000.
  • This option can only be used in a single calendar year during your lifetime. Your spouse can also use this option in the same year or a different year.

It is important to note that for all QCD-funded charitable gift annuities:

  • A QCD transfer itself is not typically subject to federal income tax, unless made from documented after-tax contributions to the IRA. Some states treat the QCD like a withdrawal for state tax purposes, but this varies from state to state. There is no charitable income tax deduction for the QCD transfer.
  • The full amount of each payment received from your IRA-funded charitable gift annuity will be subject to ordinary income tax.
  • The annuity income interest is not assignable, including to the charitable beneficiary. You (and/or your spouse) will receive the annuity income for your lifetime.

Example:  Betty is 74 years old and has a traditional IRA. Betty has to take a RMD from her IRA this year, but does not need the income and would like to minimize taxes this year. Betty decides to make a $25,000 QCD transfer to Duke to establish a charitable gift annuity, an election she can make in one tax year during her lifetime. Betty’s charitable gift annuity will pay her $1,600 each year (a 6.4% annuity rate)* for as long as she lives. Betty is looking forward to providing a generous gift to Duke while receiving the security of a fixed income for the rest of her life and reducing her tax burden this year.

*Rate is based on American Council on Gift Annuities 2023 rate schedule.

Please check with your financial advisor to determine how establishing a charitable gift annuity through a QCD will impact you.


CONNECT WITH US

Duke University’s Office of Gift Planning has charitable planning professionals available to work with you and your advisors to explore charitable giving strategies that support your financial goals now and in the future.

EMAIL: giftplanning@duke.edu
PHONE: (919) 681-0464

This information is provided with the understanding that neither Duke University nor the authors are providing legal, accounting, or other professional advice or counsel.  Please consult your personal advisors about the financial, tax, and legal implications of any gift.

TAGS: qualified charitable distribution Charitable Giving Strategies Tax Considerations charitable gift annuities charitable IRA rollovers SECURE Act

About the author

Gift Planning

giftplanning@duke.edu

Duke University’s Office of Gift Planning specializes in charitable gift planning for estates, charitable trusts and annuities, and other complex current and future gift plans.

For more information, please contact the Duke University Office of Gift Planning at 919-681-0464 or giftplanning@duke.edu.