Using QCD’s to fund a Charitable Gift Annuity

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Are you considering making a gift to a charity or perhaps your Alma Mater?

Consider using pre-tax IRA dollars and perhaps a Charitable Gift Annuity. If you are 70 ½ or older, you can make a Qualified Charitable Distribution or QCD straight from your IRA. This distribution counts toward your required minimum distribution but is not taxable to you, even if you take the standard deduction on your income tax return. The maximum amount is $100,000 each year for each IRA holder. The client must make the distribution directly to the charitable organization.

You can also do a one-time QCD of up to $50,000 to what is called a split-interest entity and fund a charitable gift annuity (CGA).

A QCD to a split-interest entity can only be done once in a lifetime and is limited to $50,000. A split-interest Entity is a legal entity that allows a donor to receive a benefit during their lifetime or for a set term, with the remainder (anything left) benefiting a charity after the donor’s death.

I recently saw the following and thought many of you might have seen similar advertisements.

Alan’s Distribution to American Red Cross

Alan is a 75-year-old who would like to make a special contribution to

support the American Red Cross. Alan has an IRA and knows that he is facing a

required minimum distribution (RMD) this year. Alan knows that his RMD is

going to increase his income tax. Instead of withdrawing the funds from his IRA,

Alan instructs his IRA custodian to make a $50,000 QCD directly to the American

Red Cross in exchange for a charitable gift annuity, which will pay him $3,300

(6.6%) per year for the rest of his lifetime. Alan understands that he is allowed to

make this election only once. Still, he is looking forward to securing a stream of

payments for his lifetime, meeting or reducing his RMD for the year, and making a

generous contribution to the American Red Cross.

Red Cross/How You Can Give


Basically, this concept allows you to make a gift to your charity or perhaps your alma mater directly from your IRA, count this as part of your RMD, and not be taxed on it. Then you get a series of payments perhaps, for the rest of your life.

There are many other rules we did not discuss, but I love this concept. Call or email me to discuss this further!



How a QCD Could Fund a Charitable Gift Annuity (CGA)

Many charities already offer CGA’s. Now, you can fund these with a QCD. Here’s how it works:

  • The IRA owner makes a QCD (up to $50,000) and is limited to once a lifetime.
  • If less than $50,000 is transferred as a QCD to a CGA in a calendar year, the remaining amount can be transferred later that year in a separate QCD. But the remaining amount cannot be transferred in another year.
  • The charity invests the funds from the QCD in a CGA. A CGA is an annuity contract between the IRA owner and the charity in which the IRA owner makes a gift of the QCD funds to the charity. In exchange, the charity assumes a legal obligation to provide the IRA owner with a fixed monthly income until death.
  • The IRA owner can only name themselves and/or a spouse to receive the income payments. This rule is more restrictive than the rule that generally applies to CGAs when they are not funded by a QCD. In this instance the CGA can be paid over the lives of any two people married or not.
  • The interest in the CGA must be non-assignable. This rule also differs from the rules that apply to CGAs not funded by QCDs.  Often CGA beneficiaries who do not need the money can stop interest payments by assigning their interest back to the charity. This is apparently not allowed if the CGA was funded by a QCD.

More Rules

Because a CGA can be structured to last for the joint lives of a married couple, it appears that both an IRA owner and their spouse could do QCD’s to the same CGA from their own  IRAs.

The annuity payments must start no later than one year from the funding date. Deferral is not allowed.

All of the income payments are treated as ordinary income. Note: this is different than what happens when a charitable annuity is funded with non-QCD funds. In those cases, income from the CGA would include a portion that is tax-free.

There is a 5% minimum payout for CGAs that are funded with a QCD. Usually, a charity will have a standard set of rates for CGAs based on rates published annually by the American Council for Gift Annuities.

The term “Legacy IRA QCD” is sometimes used for a QCD to a split-interest entity, most commonly a CGA.

The main reason to fund a CGA with a QCD is to use IRA dollars to benefit the charity of the IRA owner’s choice.

Benefits of CGAs

QCDs to CGAs can count as RMDs but are not included as income for federal income tax purposes.

Those not itemizing their deductions can still get a tax break through funding a CGA with a QCD.

The CGA is payable for life, so there is no possibility of outliving annuity payments.


What is Still Unknown

There are still several unanswered questions regarding how QCDs to CGAs and other split-interest entities will work.

It is not certain whether the $50,000 one-time distribution is part of the overall annual $100,000 QCD limit.

It is unclear whether interest payments from a CGA  funded by a QCD would be considered net investment income and subject to the 3.8% surtax.


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