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Many people who want a reliable stream of income in retirement set up annuities to pay them a fixed annual income after they stop working. There are multiple types of annuities available, including one that allows you to donate to a cause you care about and receive an income during retirement.
This is known as a charitable gift annuity or CGA.
Key Takeaways
- A CGA is funded by a donation to a nonprofit. The donor is paid an annual income for the rest of their lifetime, after which the remainder goes to the nonprofit.
- Benefits of a CGA include reliable income during retirement, contributing to a cause you care about, and tax advantages.
- Downsides include a lack of flexibility in accessing your funds, complex rules and fees, and a decrease in purchasing power over the life of the annuity.
What Is a Charitable Gift Annuity (CGA)?
A CGA combines a donation to a charitable cause and an annuity.
To set one up, you fund a donation to a qualified charity with assets such as cash, an individual retirement account (IRA), or other investments.
The money is set aside in a reserve account and invested. Then, starting at a date agreed on in the CGA contract, the charity pays you a fixed income every year for the rest of your life from that account. These payments may be made annually or quarterly.
CGAs can be set up either as a single-life annuity (one person receives income) or a two-life annuity (two people receive income). After you and any other recipient pass away, the remainder of the donation, including any interest it has earned, goes to the charity.
You have two options when it comes to receiving income. A deferred CGA allows you to choose a specific date in the future on which to begin receiving payments. A flexible CGA allows you to select a range of future dates from which you can later choose to start your payments.
Benefits of a Charitable Gift Annuity
Annuities, particularly charitable gift annuities, are not going to be the right fit for every retiree. A financial advisor can help you decide if they are a good choice for you.
A CGA may be appropriate in your retirement strategy if you won’t need all the savings or assets you have acquired for retirement and can afford to donate some amount or if you would like to minimize the tax burden from your assets.
They may also work well if you are philanthropically-minded but nervous about having a reliable influx of money during retirement. Benefits include:
Peace of Mind in Retirement
Like other types of annuities, a CGA can provide consistent income for retirees. This not only helps you better manage your finances in retirement, but it can also create much-needed peace of mind.
“I’m talking to some people who are really concerned about Social Security,” says Melissa Joy, CFP, CDFA, and president of Pearl Planning financial advisors. For those clients, she finds that adding a dependable income stream through an annuity can be reassuring.
You Can Donate to a Cause You Care About
Unlike other types of annuities, a CGA allows you to support a cause you care about and take care of yourself.
For example, if philanthropy is an important part of your financial life, you can give meaningfully with a CGA, knowing that, after you pass away, your chosen non-profit will immediately benefit. Moreover, you don’t have to create specific provisions for your charity in your estate plan.
Tax Advantages
CGAs also come with many tax advantages. These differ depending on the assets you use to fund the annuity.
If you set up a deferred gift annuity, you receive the tax benefits the year you fund the gift, rather than the year you begin receiving payments.
- Cash: Federal tax deduction if you itemize
- Appreciated property: Federal tax deduction if you itemize, along with minimizing the capital gains tax
- IRA: Can count toward all or part of your required minimum distribution if you are 70½ or older; no tax liability on the gift even if you don’t itemize; income payments subject to ordinary income tax
Important
The tax rules around charitable gift annuities can be complex, especially if you set up a deferred annuity. Work with a tax advisor or accountant to make sure you follow all regulations and get the greatest tax benefit possible for your gift.
Downsides of Annuities in Retirement Planning
As with any retirement planning strategy, a charitable gift annuity comes with potential downsides.
If you know you are going to have limited sources of income in retirement, you might not be able to afford funding a CGA because you won’t receive the entire donation as income. Other downsides include:
Lack of Flexibility
If you want a lot of flexibility in your retirement planning, an annuity might not be right for you. Because annuities are highly regulated and pay set amounts at set times, Joy notes that they’re “not a good fit for people who want a lower-cost portfolio or people who want more control over when they can access their funds.”
Unclear Provisions
Many annuities come with complex rules, riders, and the potential for fees. For example, says Joy, many have high surrender charges. “If there’s not a clear conversation on costs with the person selling you the annuity,” she notes, “that’s a red flag.”
Make sure you understand all the fees, provisions, and features you are signing up for before you fund a CGA.
Not Offered by All Charities
Usually, CGAs are offered by large organizations, such as major non-profit institutions or universities.
If you are dedicated to a specific cause but that organization doesn’t offer gift annuities, you’ll need to set up a more traditional donation, either annually during your lifetime or through your will.
Smaller Income Payments
Because the goal of a CGA is to have money left over for the charity, the annual payments may be smaller than you would get from a traditional annuity. This could cause a problem if your financial situation changes unexpectedly during retirement.
In addition to the smaller income payments, the income from an annuity will also lose purchasing power over time. “They aren’t necessarily structured to take inflation into account, so what you’re saving today might not be worth as much in future dollars,” warns Joy.
Because of this, CGAs are a good choice for those who are looking to create a comprehensive retirement and philanthropic strategy. They should not be your only source of income in retirement.
The Bottom Line
A charitable gift annuity can create a reliable income stream during retirement while also guaranteeing that all remaining money will go to a cause you care about after your lifetime.
CGAs also allow you to take advantage of different tax benefits, depending on which assets you use to fund them. However, CGAs come with downsides, including a lack of flexible access to your money, decreased value due to inflation, and complex rules.
If you’re interested in including a CGA in your retirement plan, talk first with a financial advisor to make sure it’s a good fit for your overall financial strategy.
