Case:

Quentin was the firstborn child in a large family. Throughout his childhood, Quentin’s parents worked hard to put food on the table for their children. They also instilled in Quentin the value of hard work and saving money. Quentin took those lessons to heart, putting forth his best effort in school, finding a rewarding job and saving as much as possible. For many years, Quentin worked for a company that offered a 401(k) plan. During those years, he put as much into his 401(k) as he could afford so that he could maximize the benefit of his employer’s matching contributions. Eventually, Quentin moved on to other employment and made a tax-free rollover of his 401(k) into a traditional IRA. As he approached retirement, Quentin continued to contribute to his retirement savings by maxing out his IRA contributions each year.

With his lifelong penchant for saving money and some savvy investing, Quentin was able to retire comfortably at age 65. Now in his early 70s, Quentin knows he will begin taking required minimum distributions (RMD) from his IRA at age 73. Given his lifetime savings, investment income and social security distributions, Quentin would like to use his IRA to leave a legacy but is worried about outliving his retirement fund. Quentin would like to use his RMD to make a charitable gift but also receive income for his lifetime.

Question:

Quentin has discussed charitable remainder trusts (CRTs) and charitable gift annuities (CGAs) with his professional advisor in the past, and he wonders whether one of these life income arrangements might be beneficial in his circumstances. Is Quentin permitted to use an IRA charitable rollover gift to fund a CRT or CGA?

Solution:

The SECURE 2.0 Act took effect in 2023 and modified Sec. 408(d)(8) regarding qualified charitable distributions (QCD), also known as an IRA charitable rollover. The law indexed the IRA charitable rollover limit of $100,000 to inflation in future years. In 2025, the IRA gift limit is $108,000 for QCDs from IRAs for owners age 70½ or older. The SECURE 2.0 Act also expanded IRA gifts to allow one-time funding of CRTs and CGAs. With inflation adjustments, the limit this year is $54,000. The income payments from the CRT or CGA are fully subject to tax and can only benefit the IRA owner, the IRA owner’s spouse or both. Additionally, there is no charitable tax deduction for the CRT or CGA, the income interest is not assignable and the minimum payout is 5%.

With an IRA QCD, the entire distribution transferred to the charity must qualify for a Sec. 170 charitable deduction. Sec. 408(d)(8)(C). The donor may not receive anything of value in return for the QCD, except for the lifetime income from the CRT or CGA. The lifetime income option is a single tax year election. Once the donor elects to use this option, the donor is ineligible to do it again in the future even if the limit increases beyond what was elected in a prior year.