Is Funding a Charitable Gift Annuity (CGA) with a Required Minimum Distribution (RMD) Worth It?
For fundraisers, educating donors about tax-efficient giving strategies is an essential part of securing and maximizing their support. Among the many strategies, funding a Charitable Gift Annuity (CGA) with a Required Minimum Distribution (RMD) from an IRA is an increasingly popular topic, especially for donors age 70½ and older who want to make a meaningful impact while also addressing their tax obligations.
But is it truly worth it? And how do you guide your donors in making this decision? Let’s break down how the process works, the benefits, and whether it aligns with donor goals.
How Does Funding a CGA with an RMD Work?
For donors with a traditional IRA, the IRS requires individuals to take annual Required Minimum Distributions (RMDs) starting at age 73 (or age 70½ for Qualified Charitable Distributions, QCDs). These RMDs are often a taxable event, which can lead to an increase in a donor’s income taxes.
However, there’s a charitable strategy worth exploring. A donor can use their RMD to fund a CGA—a giving vehicle that benefits the donor as well as the charity. Here’s how it works:
- The donor uses their RMD (via a QCD) to fund a CGA.
- The CGA provides the donor (or a designated beneficiary) with steady, fixed payments for life.
- The remainder of the CGA is donated to the charity of the donor’s choice.
This creates a win-win scenario for the donor and your organization.
Why Would Donors Consider This Strategy?
The real question fundraisers need to address when discussing this approach is whether it meets the donor’s financial and philanthropic goals. Here’s why many donors are drawn to the RMD-to-CGA approach:
- Tax Benefits
By funding a CGA with a QCD, donors can transfer up to $100,000 of their RMD (per year) directly to charity tax-free. This not only helps satisfy their RMD obligation but also avoids the tax burden associated with the withdrawal.
- Lifetime Income
A CGA offers predictable, fixed payments for life. For many older donors, this appeals to their desire for financial stability in retirement while still supporting causes they care about.
- Impactful Giving
Donors find comfort in knowing that after they receive their lifetime payments, the remainder of the CGA will support your mission, leaving a lasting legacy.
- Simplified Planning
For donors trying to balance philanthropic interests with income needs and tax strategies, combining an RMD with a CGA creates a simple yet effective path to achieving multiple goals.
What Are the Potential Limitations?
It’s important for fundraisers to emphasize that, while this strategy holds significant advantages, it’s not for everyone. Some considerations include:
- Minimum Age Requirements: QCDs for funding a CGA are only available to donors 70½ or older.
- Payment Rates & Inflation: CGA payout rates are fixed, meaning they won’t adjust for inflation. Donors will need to ensure this aligns with their income goals.
- Charitable Intent: This strategy is most attractive to donors with a strong desire to leave a meaningful impact on charity. It may not appeal to donors more focused on maximizing financial returns.
Is It Worth It?
The worth of funding a CGA with an RMD lies in the alignment between the donor’s personal goals and the benefits this strategy offers. Here’s a breakdown of when this approach might be especially suitable:
- For the Tax-Conscious Donor: If the donor is concerned about a large tax bill from their RMDs, the QCD-to-CGA strategy can eliminate the taxable income while still satisfying the RMD requirements.
- For the Legacy-Minded Donor: Donors who want to include charitable giving as part of their estate planning will find this strategy particularly appealing.
- For the ‘Mission Driven’ Donor: When donors are passionate about supporting your mission and are financially stable, a CGA can provide peace of mind while aligning tax and giving goals.
How to Discuss This with Your Donors
When introducing this strategy to donors, focus on clear communication and personalized discussions. Here’s how:
- Educate with Simplicity: Use visuals and clear language to explain how RMDs, QCDs, and CGAs work together.
- Highlight Flexibility: Explain how this strategy can complement their retirement plan alongside other tools like outright gifts or donor-advised funds.
- Share Examples: Use case studies to demonstrate real-world benefits. For instance:
> “A long-time donor wanted to support our scholarship fund and was facing a hefty tax bill from her $50,000 RMD. She directed the amount to create a CGA, eliminated the tax burden, received an annual income for retirement, and left a significant legacy for students.”
- Leverage Tools: Provide them with free resources, such as a CGA calculator or personalized gift illustrations, to show how the numbers work.
Closing the Conversation with a Call to Action
For fundraisers, the goal isn’t just about closing a gift; it’s about empowering donors to make informed, meaningful decisions. End conversations with next steps:
- “If you’d like, I can provide a personalized illustration to show how this could work for you.”
- “Would you like to schedule a meeting with our gift planning team to discuss your options further?”
- “Click here to access our free guide on using RMDs to fund charitable gifts.”
By focusing on education and donor-specific benefits, you’re not just raising funds but building relationships and trust.
Final Thoughts
Funding a CGA with an RMD offers a creative and impactful way for donors to balance tax efficiency, financial security, and generous giving. It’s more than a strategy; it’s an opportunity to help your donors create a legacy while empowering your organization’s mission.
Are you ready to guide your donors through this process? If you’d like to explore how to work RMD-to-CGA funding strategies into your fundraising plan, contact us for a free consultation or download our curated guide today!