A Simpler Look at Charitable Giving in the SECURE Act 2.0 Era

In recent times, charitable giving has become an important tool in tax planning and retirement strategies. With the recent changes brought by the SECURE Act 2.0, the rules around charitable giving, particularly for retirees, have expanded and transformed. Let's take a look at how these changes affect a popular form of charitable giving: the Charitable Gift Annuity.

What's a Charitable Gift Annuity (CGA)?

A CGA is like a two-way deal with a charity. You make a significant donation, and the charity, in turn, gives you a steady income for life. When you pass away, any leftover money from your initial donation goes to the charity. You get the benefit of supporting a cause close to your heart while securing a consistent income stream for yourself, or someone you choose.

The New Rule: Legacy IRA Qualified Charitable Distributions (QCDs)

Under the SECURE Act 2.0, a significant change has been introduced, expanding the scope of how your Individual Retirement Account (IRA) can be used for charitable giving. If you are aged 70½ or older, you can now make a tax-free gift of up to $50,000 from your IRA to fund a CGA. This special gift, known as a legacy IRA QCD, counts towards your required minimum distribution (RMD) - the minimum amount you must withdraw from your retirement account each year.

How does the Legacy IRA QCD work?

This one-time gift allows you to make a considerable donation to multiple charities. If you decide to donate $30,000 this year, remember, you only have until the end of the year to use up the remaining $20,000. If you don't, you'll lose the opportunity to make the maximum donation.

Despite these attractive benefits, the legacy QCD does come with its caveats. Firstly, there is no tax deduction for the legacy QCD as with typical charitable gifts. Secondly, this legacy QCD can only include IRA assets, excluding other types of assets you might possess. Lastly, remember that all the income you get from the CGA, established with a legacy QCD, will be treated as ordinary income, potentially affecting your tax liability.

The SECURE Act 2.0 and RMD Age Changes

It's also important to note that the SECURE Act 2.0 has shifted the age you need to start making RMDs. As of January 1, 2023, you only have to start taking these distributions at 73 instead of 70½. By 2033, this age will be raised again to 75.

Is a CGA right for you?

Deciding if a CGA is the right choice for you depends on various factors. If you want to support a cause you care about while ensuring a steady income for yourself or another beneficiary, a CGA might be a good choice. It allows you to manage potential capital gains tax and support your chosen charity with a significant donation. However, it's crucial to remember that the charity's ability to make future payments depends on its financial health.

Whether you're considering a CGA, legacy IRA QCD, or any other form of charitable giving, it's always a good idea to talk to your financial advisor. They can provide you with personalized advice, factoring in the complexities of tax laws and your financial situation.

The SECURE Act 2.0 has broadened the landscape of charitable giving, providing IRA holders with more flexibility in their retirement and philanthropic strategies. Despite the opportunities, it's essential to navigate these changes wisely, considering their long-term effects on your income and taxes. Always consult with your financial advisor before making significant financial decisions. They can guide you in leveraging these new provisions to align with your financial goals and charitable intentions effectively.

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