The new year brings exciting changes! In 2024, IRA-qualified charitable distribution (QCD) transfers for outright gifts are permitted up to $105,000 and up to $53,000 for the one-time election of a QCD to a CGA or CRT. The American Council on Gift Annuities suggested that the maximum rate increase is effective for gift dates on or after January 1, 2024.
Observations
When a QCD for a CGA Makes Sense:
- The QCD for CGA is generally more beneficial than funding a CGA with cash when the donor can get the full tax benefit from itemizing the charitable deduction for making the gift and has an RMD equal to or greater than the funding amount. This is true whether the donor is in the 24%- or 37%-income tax bracket, whether I discount future annuity payments at 3.25%/year or 5.0%/year, and whether the donor lives 9 years, 14 years, or 19 years. The shorter the annuity lasts, and the higher the donor’s tax bracket or the present value rate applied, the bigger the percentage difference in the total benefit.
- The QCD for CGA is substantially more beneficial than giving cash when the donor cannot use the charitable deduction to offset any of the tax on their RMD. Under these conditions, a QCD is even better for the donor than giving long-term gain property with a 50% cost basis: the benefit of the QCD for CGA is unaffected, while the lost income tax savings from the charitable deduction reduces the benefit of giving cash or long-term gain property (by $6,061 in my example). Which donors cannot use their charitable deductions? Donors who don’t itemize their deductions or who have reached their percentage of AGI limit on charitable deductions.
When a QCD for a CGA May Not Make Sense:
- The QCD for CGA is less beneficial than funding a CGA with long-term gain property that has a cost basis of 50% when the donor can get the full tax benefit from the charitable deduction and has an RMD equal to or greater than the funding amount. The charitable deduction and capital gains tax avoided at the outset, along with reporting the remaining capital gain over the donor’s life expectancy, more than compensates for the disadvantage of paying tax on the RMD. A cost basis lower than 50% would increase the advantage of funding the CGA with long-term gain property rather than a QCD.
- If the donor can’t use their QCD to fulfill their RMD – because the donor has already fulfilled their RMD for the year or is not yet 73 and therefore not required to take an RMD – the donor should wait until they can use their gift to fulfill their RMD. Otherwise, they will lose the tax benefit of reducing their RMD by the amount of their QCD ($12,000 in my example). If they can use only some of their QCD to fulfill their RMD, they should weigh whether they want to use their QCD now to fund a CGA or wait until they can take greater advantage of the RMD benefit. They also should consider using cash or appreciated property to fund the CGA if those assets are available to them.
Conclusion
Using a QCD to fund a CGA can make good financial sense for some donors. This new option should be especially appealing to donors who don’t itemize their charitable deductions and can use their entire QCD toward fulfillment of their RMD. For donors who do itemize, using a QCD to fund a CGA still compares favorably to using cash so long as the donor can use their entire QCD toward fulfillment of their RMD.
The option to fund a CGA with a QCD is an exciting new gift to talk about with your donors. Before you start exploring the QCD for CGA option with a donor, however, first establish that the donor is interested in funding a CGA. If the answer is yes, then it is time to discuss funding options. If the donor is over 70½ or, even better, over 73, it makes sense to include the QCD option in your discussion.
Keep in mind, a donor can use a QCD to fund a CGA in one year only. This limitation puts a premium on the donor using a QCD to fund a CGA when it is most beneficial. They won’t get to do it again.