When Your Donor Should Consider a QCD for a CGA . . . and When They Shouldn’t!

Since January 1, 2023, it has been possible for a donor to make a qualified charitable distribution (QCD) from an IRA of up to $50,000 to fund a gift annuity. This new giving opportunity has sparked a lot of interest among gift planners. Some have already helped donors complete this type of gift.

Many limitations apply to the QCD for CGA arrangement in addition to the $50,000 maximum: the donor can make this type of gift in one year only and must be at least 70 ½ years old, only the donor and the donor’s spouse can be annuitants, the gift is not deductible, the donor cannot defer the annuity payments, and all annuity payments are fully taxable as ordinary income. On the positive side, the distribution from the IRA is not taxable and counts toward the donor’s required minimum distribution (RMD) for the year.

Which raises the question: Under what circumstances, if any, does funding a gift annuity with a QCD make financial sense?

To answer this question, I analyzed the financial benefits of a 79-year-old donor/annuitant (the “donor”) funding a $50,000 CGA with either a QCD, cash, or long-term gain property with a 50% cost basis. I chose 79 because that’s the average age of the annuitant when a CGA is funded according to the 2021 American Council on Gift Annuities survey. I projected the benefits under a matrix of conditions to see what patterns emerged. In each case, I kept the funding amount of the CGA at $50,000, so the benefit to the charity is the same in all cases. Only the benefit to the donor varies.

The table below shows my analysis for a donor in the 24% income tax bracket (15% for capital gains) who itemizes their deductions and must take an RMD of $50,000 or more in the year of the gift. I arrived at the donor’s total benefit by subtracting the initial tax cost of making the gift (shown as a negative net tax savings in the table) from the total after-tax value of the annuity payments over the life of the donor. Since the income tax savings are immediate, but the annuity payments occur over many years, I also show the total benefit when I discount the annuity payments at 3.25% or 5.0% per year.

  Donor Can Use Deduction
and Has $50,000 RMD
  QCD to CGA Cash 50% LTCG Property
A) Contribution $50,000 $50,000 $50,000
B) Income tax on IRA distribution @ 24% $0 $12,000 $12,000
C) Charitable deduction $0 $25,254 $25,254
D) Income tax savings from charitable deduction @ 24% $0 $6,061 $6,061
E) Capital gains tax savings @ 15% $0 $0 $3,750
F) Out of pocket cost of gift (A + B – D – E) $50,000 $55,939 $52,189
Results Over 14 Years (Life Expectancy) QCD to CGA Cash 50% LTCG Property
G) Net tax savings (A - F) $0 $-5,939 $-2,189
H) Total payments to annuitant after taxes (@ 24%/15%) $39,368 $45,246 $43,409
Total benefit of payments and tax savings (G + H) $39,368 $39,307 $41,220
Total benefit of payments (pv @ 3.25%) and tax savings $31,230 $30,249 $32,450
Total benefit of payments (pv @ 5.0%) and tax savings $27,835 $26,445 $28,773

The relative benefits of funding a CGA with the different assets were similar for a donor in the 37% income tax bracket and 20% capital gains tax bracket. Likewise, the relative benefit to the donor of each funding option remained constant when I assumed the donor will die 5 years before reaching life expectancy or 5 years beyond life expectancy.


When a QCD for a CGA Makes Sense:

  1. The QCD for CGA is generally more beneficial than funding a CGA with cash when the donor can get the full tax benefit from itemizing the charitable deduction for making the gift and has an RMD equal to or greater than the funding amount. This is true whether the donor is in the 24%- or 37%-income tax bracket, whether I discount future annuity payments at 3.25%/year or 5.0%/year, and whether the donor lives 9 years, 14 years, or 19 years. The shorter the annuity lasts, and the higher the donor’s tax bracket or the present value rate applied, the bigger the percentage difference in the total benefit.

  2. The QCD for CGA is substantially more beneficial than giving cash when the donor cannot use the charitable deduction to offset any of the tax on their RMD. Under these conditions, a QCD is even better for the donor than giving long-term gain property with a 50% cost basis: the benefit of the QCD for CGA is unaffected, while the lost income tax savings from the charitable deduction reduces the benefit of giving cash or long-term gain property (by $6,061 in my example). Which donors cannot use their charitable deductions? Donors who don’t itemize their deductions or who have reached their percentage of AGI limit on charitable deductions.

When a QCD for a CGA May Not Make Sense:

  1. The QCD for CGA is less beneficial than funding a CGA with long-term gain property that has a cost basis of 50% when the donor can get the full tax benefit from the charitable deduction and has an RMD equal to or greater than the funding amount. The charitable deduction and capital gains tax avoided at the outset, along with reporting the remaining capital gain over the donor’s life expectancy, more than compensates for the disadvantage of paying tax on the RMD. A cost basis lower than 50% would increase the advantage of funding the CGA with long-term gain property rather than a QCD.

  2. If the donor can’t use their QCD to fulfill their RMD – because the donor has already fulfilled their RMD for the year or is not yet 73 and therefore not required to take an RMD – the donor should wait until they can use their gift to fulfill their RMD. Otherwise, they will lose the tax benefit of reducing their RMD by the amount of their QCD ($12,000 in my example). If they can use only some of their QCD to fulfill their RMD, they should weigh whether they want to use their QCD now to fund a CGA or wait until they can take greater advantage of the RMD benefit. They also should consider using cash or appreciated property to fund the CGA if those assets are available to them.


Using a QCD to fund a CGA can make good financial sense for some donors. This new option should be especially appealing to donors who don’t itemize their charitable deductions and can use their entire QCD toward fulfillment of their RMD. For donors who do itemize, using a QCD to fund a CGA still compares favorably to using cash so long as the donor can use their entire QCD toward fulfillment of their RMD.

The option to fund a CGA with a QCD is an exciting new gift to talk about with your donors. Before you start exploring the QCD for CGA option with a donor, however, first establish that the donor is interested in funding a CGA. If the answer is yes, then it is time to discuss funding options. If the donor is over 70½ or, even better, over 73, it makes sense to include the QCD option in your discussion.

Keep in mind, a donor can use a QCD to fund a CGA in one year only. This limitation puts a premium on the donor using a QCD to fund a CGA when it is most beneficial. They won’t get to do it again.

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