Retirees, you’ll be delighted to learn that the new SECURE 2.0 Act has brought about some exciting changes that can help you maximize your retirement income while giving back to the causes you care about. For those who have felt burdened by required minimum distributions (RMDs), this new tool could be a game-changer. In this post, I’ll walk you through how the latest RMD rules can allow you to turn charitable donations into lifelong retirement income.
How to Turn a QCD into Lifetime Income
If you’re currently 73 or older, you’re likely familiar with the concept of required minimum distributions (RMDs). These mandatory withdrawals from your Individual Retirement Account (IRA) can be a tax headache. For instance, if you turned 73 in 2022 and had a $500,000 IRA, you’d need to withdraw nearly $19,000 by the end of the year, which is then taxed as ordinary income.
However, there’s a bright side. You can make contributions of up to $100,000 each year directly from your IRA to qualified charities. The beauty of this is that the money you donate is tax-exempt, and it counts towards your annual RMD amount. Now, here’s where it gets interesting – as of January 1, if you’re 70 ½ or older, you can donate up to $50,000 of that $100,000 in a single tax year to a charitable gift annuity.
What’s a charitable gift annuity? It’s a little-known vehicle that allows you to receive fixed annual annuity payments from a charity in exchange for your donation. This annuity payment lasts for either your lifetime or the lifetime of you and your spouse, depending on your preference. The minimum payout is typically set at 5% of your initial donation or more, often following the rates provided by the American Council on Gift Annuities.
For example, let’s consider a retiree in her 70s who donated $25,000 from her IRA to her alma mater. This charitable contribution instantly reduced her taxable income from her RMD by $25,000. By directing this money towards her college’s generous gift annuity program, she secured a fixed 7% annuity. This annuity will pay her $1,750 annually for the rest of her life. If she lives for another 15 years, she’ll receive more from the annuity than the amount of her original gift.
Taxes and Other Considerations
While this strategy can lower your tax bill for a specific year, it’s important to note that annuity payments are considered ordinary income, so taxes are still a consideration. Additionally, any remaining funds after the donor’s passing are directed toward the charity.
One flexibility to remember is that the $50,000 contribution limit for charitable gift annuities must be made within a single year. However, it can be divided into smaller amounts and distributed among charities offering charitable gift annuities. It’s worth mentioning that the $100,000 generous donation limit and the $50,000 charitable gift annuity limit will be adjusted for inflation after 2023. The charity’s assets back the annuity’s stability.
Recent changes to the RMD rules have introduced new avenues for retirees to optimize their withdrawals and minimize taxes. Using RMD funds to make charitable donations not only reduces taxable income but also allows retirees to give back to causes they care about. This innovative strategy can provide lifetime income for retirees who may not have otherwise been able to afford charitable giving.