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A charitable gift annuity is a contract with a charitable organization that allows a donor (or donors) to make a contribution in exchange for a partial tax deduction, and a fixed income payout for life.

A charitable gift annuity combines aspects of charitable giving — which includes the satisfaction of giving to a meaningful cause, as well as a tax deduction — with the guaranteed, lifelong income stream that comes from an annuity.

When the donor and the spouse or beneficiary pass, any funds remaining in the charitable gift annuity are donated to the organization.

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, often a spouse. This stream of payments may start immediately, or after an agreed-upon period of time, and can be a steady source of income in retirement that is guaranteed through the annuity until all listed beneficiaries die.

Many organizations, such as universities and other large nonprofit entities, offer charitable gift annuity contracts. Depending on the organization, donations can be made in cash, securities, or property. The assets are invested in an account on behalf of the donor(s); the donor takes a partial tax deduction.

Depending on the donor’s age and life expectancy, they will receive fixed payments (not variable, like some annuities), without inflation adjustments, for the rest of their life.

However, there are important tax considerations to think through before purchasing a charitable gift annuity — or any annuity, for that matter.

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 a lump sum deposit (although other terms may apply).

Recommended: What is an Annuity, Exactly?

Sometimes, payments into the annuity can be made directly from an existing retirement account like a traditional IRA account, if you open an IRA, or from 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 funds have been paid back to them entirely, the annuity provider gets to keep the remainder.

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. Organizations may have age or donation amount requirements.

The donor makes a gift to the charity, and the money is set aside in a reserve account, where it’s invested. Money from the reserve account — both principal and interest — are used to pay out the fixed monthly stipend the beneficiary or beneficiaries receive. Payments are generally not adjusted for inflation, but remain steady throughout the donor’s lifetime.

Charitable annuity payments are made to the donor and beneficiary until both have passed away — at which point, any remaining 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, all while helping themselves create a secure and reliable retirement income in the meantime.

Tax Implications of Using a Charitable Gift Annuity

The tax treatment of both the donation to the charity and the payments can be complicated; investors must be sure to read the fine print and/or consult with a professional.

The initial donation might qualify for a partial tax deduction that year, based on the estimated remainder amount the charity may receive when the donor dies. If the donor can’t take a tax deduction because the donation amount exceeds income for that year, it’s possible to carry the deduction forward for up to five years.

A gift of appreciated securities or other assets may help the donor avoid a portion of the capital gains tax they would have owed if they had sold those assets; but some capital gains are factored in over time.

By and large the annuity payments are taxed as income, although a portion of the initial payments may be tax free.

What Are the Benefits of Charitable Gift Annuities?

Along with helping donors support a charity of their choosing both during and after life, charitable annuities have some other features that can make them attractive retirement vehicles for some people.

Non-Cash Donations

Many charitable gift annuities allow donors to contribute non-cash donations, including fixed-income securities and investments — and sometimes tangible assets like art and real estate. Having this option means that donors might save money on capital gains taxes.

Annuity income is generally taxed as normal income at both the federal and state levels, although as noted a portion of the payments may be tax free, based on your statistical life expectancy. And by donating real assets, buyers of charitable gift annuities might avoid paying a portion of capital gains taxes on their donation. (That said, regular income tax will still apply on any and all income received through the annuity.)

Payment Flexibility

Another nice thing about charitable gift annuities is the flexibility buyers have in receiving the payments when there is 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, as noted, 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 offer 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 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 plan. It may even be possible to set aside money for charitable giving while on a tight budget.

The Takeaway

A charitable gift annuity enables a donor to contribute 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 charity after all the beneficiaries have died, making it a good way to secure retirement income while supporting a cause 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.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

FAQ

How do you pick a good charitable gift annuity?

The right charitable gift annuity for you depends on your charitable giving goals, the rate of return on the investment (which determines the income payments), and other terms that may or may not be beneficial.

Is a charitable gift annuity a smart idea?

It depends. A charitable gift annuity offers the advantage of providing the donor with a fixed, guaranteed income stream for life — as well as a meaningful contribution to an important cause. That said, investors seeking retirement income may find higher rates through regular annuities or other options.

How much does a charitable gift annuity pay?

The terms of charitable gift annuities vary widely, depending on the organization. Some offer modest rates of return, others pay more. Donors must also factor in their age and life expectancy at the time of the donation, as well as the total amount of the donation itself.