Funding your retirement is crucial—and donating money to worthy causes is a pretty great financial goal, too. When used correctly, a charitable gift annuity can help you accomplish both of those objectives at the same time.
What Is a Charitable Gift Annuity?
A charitable gift annuity allows a donor to make a contribution to a charity in exchange for a fixed monthly income for both the donor and an optional additional beneficiary later in life. This stream of payments can be a steady source of income in retirement, and is guaranteed through the annuity until all listed beneficiaries die.
However, there are important tax considerations to think through before purchasing a charitable gift annuity—or any annuity, for that matter. In this article, we’ll dive into the details on how charitable annuities work, what makes them different from other kinds of annuities, and how to determine whether or not one is right for you.
Understanding the Concept of Annuities
To fully understand charitable gift annuities, it’s important to have a background on annuities in general.
An annuity is a type of financial product used to create an income stream during retirement. It’s a contract—generally between the beneficiary and an insurance company or bank—that guarantees the buyer a set monthly payment in exchange for money the buyer pays in ahead of time.
Recommended: What is an Annuity, Exactly?
Depending on the type of annuity, the beneficiary might pay for it over time or in a lump sum. Sometimes, payments into the annuity can be made directly from an existing retirement account like an IRA or 401(k). Then, the annuity provider invests the money and makes payments back to the buyer once the retirement period starts. Payments might last for a set amount of time, like 10 years, or for the rest of the beneficiary’s life.
For the provider, an annuity is basically a wager against the buyer’s life expectancy. If the buyer passes away before the retirement savings they’ve paid into the annuity—along with any interest it’s earned in the meantime—has been paid back to them entirely, the annuity provider gets to keep the change.
With a charitable gift annuity, however, it works a little bit differently.
How Does a Charitable Gift Annuity Work?
With a charitable gift annuity, the contract is drawn up not between the buyer and an insurance company or bank (as with a standard annuity), but between a donor and a qualified charity. The donor makes a gift to the charity, some of which is used immediately for whatever needs the organization supports. However, part of the money is set aside in a reserve account, where it’s invested and will grow. Money from the reserve account—both principal and interest—are used to pay out the monthly stipend the beneficiary or beneficiaries receive.
Charitable annuity payments are made to the donor and beneficiary until both have passed away—at which point, the extra money is kept by the charity and used for charitable purposes.
In this way, the buyer of a charitable gift annuity can make a gift to a cause they support even after they’re gone, all while helping themselves create a secure and reliable retirement income in the meantime.
What are the Benefits of Charitable Gift Annuities?
Along with helping donors support a charity of their choosing both in and after life, charitable annuities have some other features that can make them attractive retirement vehicles for some people.
Many charitable gift annuities allow donors to contribute non-cash donations, including fixed income securities and investments—but also tangible items like art and real estate. Having this option means that donors might save money on taxes down the line. Annuity income is generally taxed as normal income at both the federal and state levels, but by donating physical securities, buyers of charitable gift annuities might pay less in capital gains taxes. (That said, regular income tax will still apply on any and all income received through the annuity.)
Another nice thing about charitable gift annuities is the flexibility buyers have in receiving the payments when there are more than one beneficiary. Payments can either be structured to go to both beneficiaries at once, or to only kick in for the second beneficiary after the death of the first. In any case, any leftover funds will be donated to the charity when all beneficiaries have passed away.
Alternatives to Charitable Gift Annuities
Although charitable gift annuities can be a valuable tool, they may not be the right choice for every investor for a variety of reasons, including:
• Gift annuities tend to have lower rates than most commercial annuity types, so they might not maximize your retirement income.
• If you don’t have physical assets to donate, there may be more efficient ways to invest your cash.
• Income streams from any type of annuity are usually still subject to federal and state income tax, unless they’ve been purchased using a Roth IRA or Roth 401(k), whose funds have already been taxed.
For investors who’d like more control over their investments, and fewer restrictions around when and how they can access the money, there are other places to put your retirement money.
One likely option is to take advantage of an employer-sponsored retirement account like a 401(k) at work. And almost anyone can bolster their retirement savings by investing in an IRA. Those under set income limits can invest in a Roth IRA, which will allow them to take tax-free distributions once they reach retirement age.
Even if you choose an alternative retirement option, you can continue to make donating to charities part of your financial lifestyle. It may even be possible to set aside money for charitable giving while on a tight budget.
A charitable gift annuity is an annuity in which a donor contributes money to a charity, with the promise of getting regular payments in return later in life—for themselves and an optional beneficiary. Part of the initial payment, as well as any leftover funds, are donated to the participating charity after all the beneficiaries have died, making it a good way to secure retirement income while being charitable at the same time.
While a charitable annuity may be attractive to some investors, other types of retirement savings may allow an individual more nuanced control of their investments and more flexibility in the size and frequency of their withdrawals upon retirement.
There are many ways to invest for retirement, including opening a traditional, Roth, or SEP IRA with a SoFi Invest® online investing account. Members can choose between an active or automated account, and get access to a broad range of investment options, member services, and a robust suite of planning and investment tools.
SoFi Invest refers to the two investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA(www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of SoFi Digital Assets, LLC, please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.