How Charitable Gift Annuities Work

March 8, 2024 Susan Hirshman
Charitable gift annuities are in the philanthropy spotlight thanks to the SECURE 2.0 Act. Schwab wealth expert Susan Hirshman explains how they work.


I'm a regular donor to my alma mater and was recently approached about a charitable gift annuity. I'm unfamiliar with these vehicles—could you explain how they work?


A charitable gift annuity (CGA) is a lifelong contract between a donor and a 501(c)(3) qualified public charity. When you make a donation, the organization invests the gift and pays you a fixed income for life, based on your age, life expectancy, and whether there are one or two beneficiaries. At the end of your life—or your spouse's if you're giving as a couple—the charity is entitled to the remainder of the gift.

CGAs are popular right now for a couple of reasons:

  • Thanks to a provision in the SECURE 2.0 Act, individuals ages 70½ and older can make a once-in-a-lifetime distribution directly from their IRA to one or more CGAs, which will be treated as a qualified charitable distribution (QCD) and will count against your annual QCD limit. (For 2024, CGA and QCD limits are $53,000 and $105,000, respectively, and will be indexed to inflation going forward.)  This distribution is excluded from your taxable income, and it may be used to satisfy all or part of the IRS-mandated required minimum distributions (RMDs) that begin at age 73.
  • CGAs are also gaining traction in response to higher interest rates. As rates rise, so do the fixed payments made by new CGA contracts, making them that much more attractive.

Despite these advantages, CGAs have nuances that may or may not meet your needs. Here's what to consider before you donate.


  • Although payout rates vary from charity to charity and are determined by the donor's age (or donors' ages if making a joint gift), most organizations follow the recommendations set by the American Council on Gift Annuities (ACGA).
  • Some charities may offer higher rates for donors who agree to wait several years before receiving regular payments. (CGAs funded with QCDs must begin payouts immediately.) 
  • CGAs typically pay lower interest rates than regular annuities because they're "split-interest" gifts—meaning part of the gift is designed to benefit the charity and part is paid back to you.

Age and minimum investment requirements vary by organization, so make sure to discuss the details with your preferred charity, which can also give you estimates of the potential charitable deduction, the annual payout, and the gift to charity at the end of the contract.


There are also potential tax benefits—and ramifications—depending on whether you fund the CGA with after-tax assets or directly from your IRA as a QCD:

After-tax assets

As a "split-interest" gift, the portion that benefits the charity may be eligible for a tax deduction (if you itemize), up to annual IRS limits based on the type of asset. Cash gifts are deductible up to 60% of adjusted gross income (AGI), and noncash gifts, such as securities, are deductible up to 30% of AGI. (Adjusted gross income is your total income minus certain adjustments.) Contributions in excess of the AGI limits can be carried forward and used for up to the next five tax years.

Once you begin receiving income from the CGA—which you can elect to take place immediately or at a future date—a portion of the payouts will be treated as a tax-free return of your principal until the cost of the annuity is fully recovered when you reach the life expectancy (or life expectancies) stipulated in the contract. The remainder will be treated as earnings subject to federal and state income tax. (IRS rules determine what's taxable and what's not.) If you funded the annuity with appreciated assets owned longer than a year, you'll owe a portion of any capital gains tax at the time of contribution, with the rest included proportionally in your payouts over the life expectancy period. The charity will send you a Form 1099-R each year to specify how your payments should be reported for income tax purposes.


Unlike CGAs funded with after-tax assets, the income payments from an IRA-funded CGA must begin immediately and are fully taxable as ordinary income. The donated amount doesn't qualify for a charitable deduction; however, a CGA does effectively reduce your overall RMDs for the year in which it's made—and therefore reduces your potential taxable income.

Before making a gift, you should consult your tax advisor to determine the best funding method for your situation.

Other considerations

Beyond their tax treatment, it's important to understand that CGAs:

  • Are irrevocable: Once you transfer your money, there's no turning back (as opposed to standard annuities, which may allow you to terminate your contract for a lump sum, minus fees and other charges).
  • Are a one-time opportunity for those funded directly from an IRA: You can fund more than one CGA, but they must all be completed in the same tax year and collectively cannot exceed a total of $53,000.
  • Are only as safe as the charity is sound: If the organization goes belly up, your payments will disappear with no real recourse, other than to get in line with any other claimants to the charity's remaining assets.

Final thoughts

If you believe a CGA could be a good fit for your charitable pursuits, be sure to fully understand the annuity's terms before you commit, including a breakdown of income payments and an explanation of the tax benefits depending on the types of assets you intend to donate.

Ultimately, a CGA is just one way to give to charity and should always be considered in the context of your overall wealth and estate plan. Whatever you decide, I applaud your commitment to charitable giving and your interest in maximizing your impact.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

A donor's ability to claim itemized deductions is subject to a variety of limitations depending on the donor's specific tax situation.