A charitable gift annuity is an investment strategy that allows you retain an income for the rest of your lifetime while getting an immediate tax benefit for donating money to a charity. Assets are placed into an annuity where an income stream is generated for the annuity owner. The charity will receive a lump-sum distribution upon the owner's death. You can fund a charitable gift annuity with your IRA. The benefit is that you can usually get up to a 50 percent tax deduction on the donation, countering the income tax you will pay on the distribution.
Consult with a tax advisor on the benefits and disadvantages of funding a charitable gift annuity with your IRA. Each person's financial situation is unique and must be examined based on the income needed, the amount that would be contributed, and the income the asset could generate based on the age(s) of the annuitant(s).
Review the financial strength of the charity and institution guaranteeing the assets. Your income will be relying on this company fulfilling the contract of the annuity.
Determine the amount of the annuity payments. For example, if $100,000 is placed into the gift annuity for someone 70 years old with a 6.5% rate, the annuitant will receive $6,500 annually for the gift annuity.
Take your Requirement Minimum Distribution from your IRA and apply it towards funding the charitable gift annuity. This is money that you are required to take out of your IRA after age 70 1/2 and will be assessed taxes. You might as well create an income stream and get a tax deduction while you are in the process.
Calculate the present value of remainder interest. This is what determines your tax deduction on the amount which isn't the entire amount placed in the annuity since a portion will be used as an income stream. To calculate this, take the net market value of the asset and divide it by the present value of the annuity.
Charitable gift annuities are good investment options for people seeking to get a steady stream of income they can rely on for the rest of their lives while fulfilling a philanthropic desire to help. For those who are not satisfied with CD rates or don't want to liquidate equities because of capital gains taxes and are being required to take distributions on existing IRA accounts, funding the annuity with the IRA is something to consider.
If an "advisor" is pushing to take your entire IRA and place it into an annuity, be weary of this person's advice. Always consult your tax advisor and estate planning attorney before making any drastic changes or liquidations to your IRA, to determine the tax liabilities and consequences.