Using Qualified Charitable Distributions to Benefit both Yourself and Others

For many individuals, financial planning extends beyond managing their investments with the goal of a comfortable retirement in mind. It can also include the desire to make a positive impact through charitable giving. Charitable Gift Annuities (CGAs) have long been a popular way for individuals to address both their retirement goals as well as their philanthropic interests.

Traditionally, Charitable Gift Annuities (CGAs) have allowed individuals to contribute a lump sum to a charity in exchange for fixed recurring payments for life, aligning their funds with charitable values while securing a lifelong income. Historically, CGAs could only be funded with after-tax dollars, which posed challenges for those with tax-deferred funds. However, the SECURE 2.0 Act, passed by Congress in December 2022, enables individuals over 70 1/2 to make a tax-exempt Qualified Charitable Distribution (QCD) of up to $50,000 from their IRA into a Charitable Gift Annuity.

The new IRA rule has three main benefits:

  • It helps donors realize their philanthropic goals.
  • It provides a tax benefit, since the contribution counts as part or all of the donor’s “Required Minimum Distribution” yet is not subject to income tax in the year of the contribution.
  • It establishes a reliable, lifelong income source that can contribute meaningfully to the donor’s retirement plan.

Granted, a Qualified Charitable Distribution from an IRA might play only a limited role in a larger financial strategy, as the $50,000 lifetime limit may represent a small fraction of high-net-worth family’s assets. Yet for affluent Baby Boomers juggling retirement income and charitable objectives, QCDs can still be a valuable tool.

For example, many individuals with large IRAs don’t actually need all of the income that early RMDs (Requirement Minimum Distributions) generate. In such cases, a QCD can stretch out both the income as well as the tax while providing additional insurance against a long-term cash shortfall.

In addition, many affluent retirees can leverage relatively low income years before their Social Security benefits and their IRA Required Minimum Distributions kick in to do Roth conversions at preferential tax rates. But once both their Social Security and RMD income streams begin, the tax cost of such Roth conversions can go up significantly. Since a Charitable Gift Annuity can quality as a Required Minimum Distribution, however, such a retiree has up to $50,000 of additional ‘tax room’ in the year of the contribution before hitting a higher tax rate. This can enable her to do a final Roth Conversion before more permanent, higher retirement income (along with higher tax rates) takes effect. And by converting a traditional IRA money to a Roth and paying taxes early in retirement, the retiree will be able to enjoy tax-free withdrawals over the remainder of her lifetime.

If you have questions about how you might take advantage of a Qualified Charitable Distribution to fuel both your retirement as well as your ability to do good, talk to your Griffin Black Wealth Advisor.

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While the holiday season is ideally a time for family and friends, it is also a good time to review tax strategies for the current as well as the coming year. Tax planning includes possibilities such as tax-loss harvesting, choices of investment vehicles, order withdrawal optimization, and many others. Given the complexity of these considerations, it’s important to work with a trusted financial professional to best understand each approach and its implications. It’s also important to understand the economic climate’s effect on taxes, especially the impact of inflation. What should investors know as they plan for 2024?
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