The Legacy IRA—Creating a Lifelong Income Stream by Utilizing Your IRA to Fund a Split-Interest Gift Arrangement With Your Favorite Charity

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As we enter 2024, many retirees are already considering how much money they are required to withdraw from their individual retirement account (IRA). That annual withdrawal means more taxable income, something many of us would like to avoid. The SECURE Act 2.0 (setting every community up for retirement enhancement) signed into law by President Joe Biden in late 2022 contained a unique provision which allows retirees over the age of 70½ to use the mandatory annual withdrawal in a single year to fund a charitable gift which will create an income stream over the remainder of his or her life or the life of the IRA holder and his or her spouse! This type of charitable gift is referred to as a split-interest gift arrangement because both the donor and the charity are beneficiaries: the donor receives a lifelong income stream, and the charity receives the remainder after the donor’s death. Creating a “Legacy IRA” through the creation of a split-interest gift arrangement is a great strategy allowing the retiree to defer taxes, receive income, and make a charitable gift, all in one transaction.

For example, John and Lisa are both in their mid-70s, and John’s required minimum distribution (RMD) for 2024 is $70,000. John is required to take that distribution, and it will be treated as taxable income and add to his adjusted gross income (AGI) in 2024. John does not need all the money immediately and wonders if there is a way to defer the distribution and avoid the immediate tax implications?

The Backstory: What Is a Required Minimum Distribution?

An individual retirement account (IRA) allows the investor’s assets to grow tax free. However, at some point the Internal Revenue Service requires the investor to begin taking withdrawals from their IRA. The annual amount that a retiree is required to take from his or her IRA is referred to as a required minimum distribution (RMD). That annual RMD used to begin for retirees at age 70½, but under the SECURE Act 2.0, retirees now have until age 73 to begin taking their RMD. In each subsequent year, this RMD adjusts based on the remaining life expectancy of the IRA owner. The RMD adds to the owner’s annual taxable income. The distribution is treated as ordinary income and raises the retirees adjusted gross income or AGI resulting in a higher tax burden to the individual.

What About the Qualified Charitable Distribution—How Does That Work?

Following the Tax Cuts and Jobs Act of 2017, the standard deduction available to most taxpayers nearly doubled. Ostensibly, this action simplified tax filing for many Americans and resulted in the vast majority of filers taking the standard deduction rather than itemizing individual deductions for tax purposes. One result of this legislation was that far fewer Americans were able to receive a direct tax benefit from their generosity.