Case of the Week

Case:

Quentin was the firstborn child in a large family. Throughout his childhood, Quentin's parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and putting away as much in savings as he could. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford so that he could maximize the benefit of his employer's matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into an IRA. As he approached retirement, Quentin continued to invest in his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Quentin, age 78, is now taking required minimum distributions (RMDs) from his IRA. Given his lifetime savings, investment income and social security distributions, Quentin would like to hedge his retirement security and benefit his favorite charity. He has considered creating a charitable gift annuity (CGA) with his favorite charity.

Question:

Quentin wonders whether he could use his IRA qualified charitable distributions (QCD) to fund a charitable gift annuity with his favorite charity. He sends an email to his advisor asking whether an IRA QCD may be used to fund a charitable gift annuity.

Solution:

Quentin's advisor explains that the Secure 2.0 Act allows a one-time QCD rollover of up to $53,000 this year from a traditional IRA to fund a life income plan. To be eligible, the donor must be 70½ or older and the distribution must be a QCD from a traditional IRA paid directly to charity.

The Secure 2.0 Act amended Internal Revenue Code Section 408(d)(8) and created a limited one-time QCD into qualified life income plans. The QCD IRA distribution may be to a charitable remainder annuity trust, a standard payout charitable remainder unitrust or an immediate charitable gift annuity. For charitable gift annuities, the payout must be at least 5%. The lifetime income must benefit the IRA owner, the IRA owner's spouse or both. Additionally, there is no charitable tax deduction, the income interest must be non-assignable and all payments will be taxed as ordinary income.

If the IRA custodian does not have a specific form, the IRA owner may send a letter to the IRA custodian similar to the following:

IRA CUSTODIAN INSTRUCTION LETTER - IRA GIFT TO CHARITABLE GIFT ANNUITY

[DATE]

Subject: Request to Initiate IRA Qualified Charitable Distributions to Fund a Charitable Gift Annuity

Dear IRA Custodian,

Federal law permits the account holder of an IRA who is 70½ or older to make a Qualified Charitable Distribution ("QCD") directly from his or her IRA to create a life income gift plan with a qualified public charity. It is my intention that the gift be treated as a QCD to fund a charitable gift annuity.

As the owner of IRA Account [Account Number] that is in the custody of your organization, I request that you make a $53,000 QCD to the following organization to fund a charitable gift annuity with myself as the income recipient: $53,000 to [Name of Charity] with an address of [Address of Charity] with the following Tax ID Number: [Charity's Tax ID Number].

I understand that this is a one-time QCD election, with a maximum amount of $53,000 permitted to be transferred for the purpose of funding a life income gift plan. This letter is sufficient authorization for you to make the $53,000 QCD gift listed above. However, if you require any further documents, please forward those to me for my signature.

Cordially yours,

IRA Owner
cc: Favorite Charity