January 31, 2023

We’ve seen some big changes to Federal Tax Laws in the past few years, and 2023 will continue this trend. The most recent changes come from the “SECURE Act 2.0,” which took effect on January 1 of this year.

The new law marks Congress’ most recent step toward making retirement savings and security more accessible for U.S. households, and contains dozens of provisions related to retirement planning across generations.

In a nutshell, SECURE 2.0 attempts to:

1. Increase access to retirement plans (for those who are not yet saving)
2. Help save more money for retirement (for those who already have a retirement plan)
3. Preserve retirement savings and income (for those who are already retired)

There’s a lot in this new law, so we won’t go through it all here. Instead, we’d like to focus on how the new rules might help those who find themselves in category #3 above: retirees who would like to preserve (and grow) their nest egg, while continuing to support their favorite charities.

Specifically, we’d like to show you how SECURE 2.0 provides a substantial gift for those who’d like to support a charity like Mercy Home – up to $50,000 in tax incentives and future payments!

One Gift, Two Planning Strategies

Let’s cut to the chase: The new rules allow you – for the first time – to use your IRA to fund a charitable gift annuity. This means you could take an asset that would increase your taxable income in this year (the Required Minimum Distribution from your IRA), and use it to fund a gift annuity to a charity like Mercy Home instead. Then, through the annuity, Mercy Home would pay you back at a guaranteed fixed rate – up to 10% – over the remainder of your lifetime.

Example:
Dorothy is 81 years old, and is getting ready to withdraw her Required Minimum Distribution (RMD) from her IRA in a few months. She knows that she’ll need to take out $50,000 in order to satisfy her RMD this year.

Dorothy doesn’t need the money from her IRA, so typically uses the Qualified Charitable Distribution (QCD) method to send donations directly to her favorite charities, including Mercy Home. (She doesn’t itemize deductions on her income taxes, so this is the best way for her to lower her tax bill). Dorothy is worried about inflation and rising expenses, but she also knows that the tax laws have changed in her favor. She’d like to take advantage by using her RMD to fund a Charitable Gift Annuity (CGA) this year.

Dorothy calls her IRA custodian and directs him to send the full $50,000 to Mercy Home, in exchange for a new charitable gift annuity. This will fulfill her RMD requirement for the year, and she’ll receive $338 per month – guaranteed – for the rest of her life. And best of all, she’ll have the knowledge that her gift has helped to create a bright future for the young people at Mercy Home!

You read that right: with one simple call, you can lower your taxable income by up to $50,000, receive guaranteed payments for the remainder of your life, and help build a brighter future for kids at Mercy Home!

Essentially, this new method merges two tried-and-true gift planning strategies to form a single charitable gift (and allows you to reap all the tax benefits for yourself). Rather than a choice between using your IRA for charitable gifts (known as the Qualified Charitable Distribution, or “QCD” method), or receiving payments back from a Life Income Plan (known as a Charitable Gift Annuity, or “CGA”), the new law allows you to have the best of both worlds. You can now use your Required Minimum Distribution from your IRA to directly fund a Charitable Gift Annuity. With inflation still hovering at historic highs, and annuity rates following suit, now is a great time to take advantage of this new strategy.

While tax benefits are rarely the primary consideration when making a charitable gift, the advantages of SECURE 2.0 may inform how – and how much – you can give. Because everyone’s financial situation is different, it’s always best to reach out to your tax advisor to discuss whether this new strategy could benefit you and your family.