Retirement planning power tool

Special to the JournalMarch 28, 2017 

Phil Hanson

JESHORTON

Today I want to share some ideas on a retirement planning tool for charitably minded baby boomers who may already be maximizing their contribution to their IRA. For those who would like to leave a legacy and include a gift to charity in their estate plan, a Deferred Charitable Gift Annuity is a powerful tool to consider.

First, let’s talk about just what is a Charitable Gift Annuity, or a CGA. A CGA is a contract with a nonprofit, where in exchange for a contribution, the nonprofit guarantees an annual payment of a set amount to an individual or a couple for their lifetime. The balance or remainder of this gift is then used by the charity to achieve their mission.

A Deferred CGA is where the contribution is made now and the annuity payment is deferred to a later date.

Let’s look at an example to demonstrate how this works and the benefits of this tool. For example, a married couple who are now 56 years of age and in their peak earning years of their careers. They have IRAs and are making the maximum contribution each year but still would like to put a little more away into a retirement account.

Another tax deduction would also be beneficial. They also would like to create a legacy gift to benefit their church.

The couple creates with the Truman Heartland Community Foundation a Deferred CGA contract. The plan is for them to contribute $4,200 each year for six years, for a total contribution of $25,200. They defer their annuity payment until they reach their full retirement age for Social Security, age 67.

Over the six years they are making the contribution they receive a partial tax deduction for their contribution of $5,392, which saves them $1,779 in taxes since they are in a 33 percent tax bracket.

At age 67 they begin receiving an annual annuity of $1,512 based on a 6 percent annuity contract (6percent of the contribution amount) that they will continue to receive for both of their lifetimes. This amount will not change from year to year but will remain at $1,512.

Also over half of this amount, $858 will be income that is tax free. So, a similar taxable investment would need to earn 8.2 percent to have the same return. It is estimated over their lifetimes that they will receive $42,741.

The foundation through our investment committee and professional advisers invests their contributions and tracks the investment returns and annuity payments in a fund specifically set up for this annuity. If we estimate a conservative average annual return of 5 percent, the fund would have $54,547 remaining in the fund after their lifetimes to create an endowment to benefit their church that would pay out approximately $2,700 per year to their church.

Through this Deferred Charitable Gift Annuity they have provided a significant legacy gift to their church and also received reliable income for themselves in their retirement, as well as a tax deduction during their peak earning years. You can see from this example why it’s a retirement planning “power tool” for those who wish to leave a legacy and support their favorite charity or charities.

For more information, contact Phillip J. Hanson President and CEO of Truman Heartland Community Foundation, 816-836-8189 or hanson@thcf.org

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