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How does a charitable gift annuity work?

Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted...

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella...

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UPDATED: Mar 19, 2020

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Charitable Gift AnnuityA charitable gift annuity is a way of making a donation to a favorite charity while benefitting from it with monthly income revenue. Instead of giving your money to a charity through your will, you can give it to them while you’re still alive and receive part of it back every month when you are retired.

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Annuities can be added to your retirement plan to provide you with money when you reach the age of 59½ years of age. By purchasing a charitable gift annuity instead of a regular annuity, you get to support a not for profit organization instead of an insurance company.

There are some differences between charitable gift annuities and non charitable gift annuities. Unlike regular annuities where you can choose between a fixed one or a variable one, your charitable gift annuity will pay you a fixed income every month.

How Charitable Gift Annuities Work

Once you decide to add an annuity to your investment options you can consider whether or not a charitable gift annuity is right for you. One of the benefits to buying a charitable gift annuity is that you get to give your money to your charity while you are still alive and you still get to use your money while you live off it.

The money used to buy your annuity will be invested conservatively in various low risk growth funds. Once you reach the legal retirement age of 59½ you will begin to draw a steady monthly income out of your annuity investment.

You will continue to draw the money every month until you die, at which time the charitable organization retains the remainder of the annuity fund for its own use. If the money runs out before you die then the charitable organization is still obligated to pay your monthly income, using its own funds as necessary.

Since annuities are usually invested conservatively, they do not usually lose money. However, since the market can fluctuate at any time, there is no guaranteed rate of return depending on the type of annuity you select. The only thing guaranteed in a charitable gift annuity is how much you initially pay for your annuity and the money you will receive as part of your monthly annuity income.

If you set up the annuity as a two person annuity then you can extend the benefit of the annuity to someone in your family. Usually this is a spouse but it may also be an elderly parent or a sibling.

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Deciding on a Charitable Gift Annuity

There are many not for profit organizations that you may decide you want to contribute to through a charitable gift annuity. If you have a specific one in mind, then you can simply call the director of the organization and tell him or her your wishes. They will be more than happy to assist you with the details.

If you like the idea of a charitable gift annuity, but do not already have an organization in mind, you can approach it from a category angle. For example, perhaps you are interested in the arts or cultural organizations, so you may decide to set up your annuity with the New York Metropolitan Opera.

Other categories to consider are:

  • Community fundraisers
  • Educational institutions
  • Environmental organizations
  • Hospital and health care organizations
  • Social service organizations
  • Religious organizations

You can even set up your annuity to sponsor organizations such as the American Red Cross or the PETA Foundation.

Taxations on a Charitable Gift Annuity

Annuities are subject to certain taxes, but charitable gift annuities may be taxed differently. For example, annuities are subject to income tax but a portion of a charitable gift annuity may be tax deductible.

The IRS has a tax table for charitable gifts to help determine the portion of your contribution that is allowed to be deducted from your taxes under a donation classification. Typically the tax-free amount of the donation is the amount of the money funded minus the planned payments expected to be withdrawn.

There are other tax considerations when funding your annuity, such as how a cash contribution is taxed versus a contribution of real estate. Some of it may be taxed as income while part of it may be taxed as capital gains or not taxed at all.

All withdrawn money from annuities will be taxed an early withdrawal penalty if you take out the money before you reach the age of 59½. The current penalty rate is 10% of the amount of money prematurely withdrawn.

When you review your options for retirement income, annuities may fit in your plan. If you are interested in receiving a steady amount of money every month during your retirement years, annuities can provide you with that option. A charitable gift annuity also benefits the organization of your choice. Get online annuity quotes by entering your zip code in the field on this page, now!

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