Deferred Charitable Gift Annuity may be a great retirement planning tool for charitably-minded baby boomers, who may already be maximizing contributions to their IRAs.
A Charitable Gift Annuity (CGA) is a contract with a non-profit. The agreement states that, in exchange for a contribution, the non-profit guarantees an annual payment of a set amount to an individual or a couple for their lifetime. The remainder of the gift is used by the charity for their own purposes. A Deferred CGA is where the contribution is made now and the annuity payment is deferred to a later time.
Here’s an example to illustrate how this works and the benefits. Let’s say we have a married couple, Bob, and Fran, who are now both 56 and in the prime earning years of their careers. They have IRAs and are making the maximum contribution annually, but they’d still like to put some more away into a retirement account.
They could always use another tax deduction, and they’d like to create a legacy gift to benefit their church. Bob and Fran create a Deferred CGA contract with a local community foundation. They are planning on contributing $4,200 annually for six years. That’s a total contribution of $25,200. Bob and Fran will defer their annuity payment until they reach their full retirement age for Social Security, age 67. Over the six years, they’re making the contribution, Bob and Fran receive a partial tax deduction for their contribution of $5,392. This saves them $1,779 in taxes since they’re in a 33% tax bracket.
At age 67, they start to get an annual annuity of $1,512 based on a 6% annuity contract (that’s 6% of the contribution amount), which they’ll keep receiving for the rest of their lives. This amount doesn’t change from year to year but will remain at $1,512. In addition, more than half of this amount ($858) will be income that’s tax-free. A similar taxable investment would need to earn 8.2% to have the same return. It’s estimated over their lifetimes that Bob and Fran will receive $42,741.
The foundation investment committee and professional advisers will invest the contributions and track the investment returns and annuity payments in a fund specifically set up for this annuity. Estimating a conservative average annual return of 5%, the fund would have $54,547 remaining in the fund after their lifetimes, to create an endowment to benefit their church that would pay out approximately $2,700 annually to their church.
The Deferred Charitable Gift Annuity allowed Bob and Fran to provide an impactful legacy gift to their church. They also received reliable income for themselves in their retirement and a tax deduction during their peak earning years. This example shows why this is a powerful retirement planning tool for those who want to leave a legacy and support their favorite charity.
Reference: Lee’s Summit Journal (March 28, 2017) “Retirement planning power tool”