When it comes to strategic giving, many donors and organizations look to maximize impact and financial benefits. Using a QCD from an IRA to fund a charitable gift annuity (CGA) can be a tax-efficient way for an individual to create an income stream and to do good in the future. CGA’s are a giving tool that provide income for the donor while supporting causes in the long run. But how does it work and why should you consider using your IRA to fund a CGA as part of your financial and philanthropic game plan?
Understanding How CGAs Work
A charitable gift annuity is a contract or agreement between a donor and a public charity where the donor contributes cash, securities or other assets to a public charity in exchange for some tax benefits and fixed income payments for life. At the end of the donor’s life, the remainder of the gift goes to the public charity. For individuals desiring to have a lasting impact while keeping financial security, this win-win arrangement can help both the donor and the charity.
Harnessing the Power of Your IRA to fund CGAs
In 2025, donors can use Qualified Charitable Distributions (QCDs) to fund CGAs instead of taking the income directly. This can be a tax-efficient play, but there are some limitations.
- The donor must be at least 70 1/2 years old at the time of the transfer.
- The transfer must be from a traditional IRA, not a 401(k), or 403(b), etc.
- The CGA funded with a QCD will not produce any income tax deductions.
- The income stream from the CGA will be taxed at ordinary income tax rates.
- Transfers from IRAs are limited to $54,000 per taxpayer or $108,000 per married couple in 2025 from their respective IRAs.
- This option can only be used once during the taxpayers lifetime.
Why Should a Donor Consider a Charitable Gift Annuity?
1. Strengthen Long-Term Financial Health
CGAs allow for predictable, steady income while reducing immediate tax liability from mandatory distributions from IRAs. Unlike assets that rely on market performance, CGAs are a more predictable source of fixed funding, helping donors to achieve their financial goals while doing good in the world
2. Increase Your Philanthropy Footprint
Since the remainder of the CGA goes to the contracted public charity after death, these gifts increase philanthropic potential over time. A CGA allows a donor to do more now by making a future impact while still satisfying immediate and ongoing income needs.
3. Build Relationships
A CGA program builds donor trust and engagement with the supported public charity. By offering structured giving options, a public charity and its donors can build long-term relationships and donors deepen their family’s commitment to the charity’s mission.
4. Create a Legacy of Giving
Many donors have the desire to create a philosophy and tradition of giving with their families. Donor Advised Funds and other planned gifts such as CGAs encourage families to unite in charitable causes. These plans can be wonderful teaching tools for the next generation. Planned gifts such as CGAs can accelerate a donor’s capacity by allowing them to start that philosophy and legacy of giving earlier in life.
What Are the Risks of Using CGAs?
With all of the good that CGAs can do, there are still inherent risks. Unlike CRTs and other charitable split-interest gifts, there is no possibility for donor involvement over the investments in a CGA. The contracted charity is 100% responsible to make sure that the investments will sustain the income stream promised to the donor. Although this is a simple and easy arrangement for the donor, they are completely trusting that the charity will make wise investment choices, remain healthy, in business and capable of making those lifetime payments. CGAs also typically offer a less aggressive payment amount as compared to non charitable annuities and this can hinder younger donors especially as they may not qualify.
What are the biggest mistakes clients make regarding CGAs?
There are several mistakes that we see clients make regarding CGAs. The first being centered around the charity providing the CGA. Creating a CGA forces a donor to pick an organization that they will partner with for their entire lifetime. Charitable organizations are constantly changing personnel, charitable missions and general operations. Donors can become disenchanted with the organization but have no recourse with their gift and payment plan. There can also be great financial instability risks by not properly assessing the charity’s ability to sustain payments, especially if it deviates from ACGA-recommended rates or lacks third-party management and oversight. It is vitally important to partner with a trusted, fiscally responsible charitable organization.
Donors also need to take care in understanding the complexities of the taxation issues associated with CGAs. CGA payments are split into tax-free principal, capital gains and ordinary income. Tax deductions may not be as high as originally anticipated as CGAs are split-interest gifts. Donors may face unexpected tax liability without proper planning when making a gift with a CGA. It is important for donors to consult tax and financial professionals before signing a CGA contract.
Building for the Future with a CGA
Charitable gift annuities are more than a financial tool; they can provide a bridge for philanthropy and financial security to work together. With proper research and preparation, a well-planned CGA can provide additional financial security and create a lasting charitable legacy.
Need help with a planned gift, donor advised fund or foundation management? Contact us today to find out how our team of experts can help.
