Your challenge: consider opening a Donor-Advised Fund
What is a donor-advised fund?
A donor-advised fund (commonly known as a DAF) is essentially an online charitable savings account. It offers a way to give strategically– and often more generously –to charity.
A DAF “lives” at a financial services firm that administers it. When you open a DAF (more on that later) and contribute money, stocks, or other assets to it, you get an immediate tax deduction in the year you contribute. You can then donate the money out of the DAF at any time in the future, offering flexibility.
The three biggest, and lowest-cost, DAF administrators are Fidelity, Vanguard, and Schwab.
Who should consider a donor-advised fund?
A DAF is smart for anyone who gives a good amount to charity each year and can accumulate $5,000 (or more) to start one.
Here are some situations in which a DAF makes especially good sense:
*if you get a large windfall. (a bonus, inheritance, or other unexpected amount) and want to donate a portion or all of it to charity.
Rather than deciding on what charity or charities to donate it to, you can contribute it to your DAF. You can donate the money at a later time, even years later.
*if you want to itemize your deductions and reduce your taxes.
With the tax changes that took effect in 2018, itemizing deductions every year makes little sense for many people. That is because itemized deductions may not be above the $12,400 for an individual and $24,800 for married filing jointly.
Here is a good basic article on the standard deduction, and pros and cons of taking it.
However, many people will be close to that “standard deduction” amount, especially when including charitable deductions.
If a person or family alternates their charitable contributions to every other year, they can use itemized deductions in one year and the standard deduction in the second, and so on.
This actually would help save on taxes, and allow for more giving to the DAF or charity. Read this article to understand more fully how “bunching” can help save on taxes and allow more giving over time.
Having the money in a DAF allows you to give more regularly to those charities directly from the DAF.
*you have stocks or mutual funds that you would like to donate.
If you have stocks or mutual funds in a taxable account, donating them directly into a DAF has significant advantages.
For stocks or funds in a taxable account that have gone up (appreciated), you can donate the amount, and avoid paying taxes on the capital gains. (The DAF, and therefor the charity, is exempt from paying capital gains, and that allows your donation to go farther).
It is also much easier for a charity to receive money (cash) rather than shares of a stock or fund. You donate the stock to a DAF first, then the money to the charity. That simplifies bookkeeping for the charity.
*if you are a retiree taking required minimum distributions (RMDs).
Donating shares directly to a DAF is also an excellent strategy for retirees. Those over 72 are required to take minimum distributions from their IRAs or other retirement accounts.
Those over 70 1/2 can donate up to $100,000 per year directly to the DAF, and entirely avoid taxes on both the contributions and any gains in the account.
How does a DAF work?
If you are interested in opening a DAF or how it works, here are some details.
First, open a DAF with a minimum contribution.
The largest and lowest-cost providers of DAFs are the low-cost brokerages: Fidelity, Schwab, and Vanguard. I will focus on those.
(Our DAF is with Fidelity, since it offers the most flexibility for both contributions and grants).
Opening a DAF takes just a few minutes. You will need your social security number and the minimum contribution to open an account.
Once that is completed, you direct the money to be in a money market account, or a variety of stock funds.
Your contribution amount is immediately tax-deductible, but you do not need to give it away yet.
Where can I open a DAF?
Here are the three main financial services firms that offer donor-advised funds:
Fidelity Charitable
- Minimum contribution to open account: $5,000
- Additional contribution: no minimum
- Minimum grant: $50
Vanguard Charitable
- Minimum contribution to open account: $25,000
- Additional contributions: $5,000
- Minimum grant: $500
Schwab Charitable
- Minimum contribution: $5,000
- additional contribution: $500
- Minimum Grant: $50
We have our DAF at Fidelity for two reasons: minimum contributions and minimum grants. Contributions are what you donate to the DAF (Fidelity’s is $5,000 to start). Grants—what you donate out of the DAF to charities require a minimum of $50.
When we set up the DAF, we put half of it in a money market account, and half in a conservative stock fund. Both have appreciated modestly, allowing us to give more.
How do you donate money from a DAF?
A donation from a DAF to your church or charity of choice is called a “grant.”
When you are ready to grant money, you log into your account and add the charity/church. You can search for a charity by name or tax ID. You can also contact the charity for its tax ID or name for charity.
Once, I had trouble locating a local nonprofit that we give to several times a year. Its “charity name” was a little different from its local name. I could get the correct charity by reaching out to its director, who shared with me the tax ID number.
After you add the charity, you can grant money, either one time or recurring. So, for instance, you can have a check sent to your church weekly or monthly. That is just the same as you would write a check each week to put in the collection basket. You can also send a grant to a charity one time.
The helpful feature here is that charities stay on the DAF grant list. When you’re ready to grant again, the charities are already “in the system.”
Are there any disadvantages to a DAF?
Several:
*the money put into a DAF is irrevocably donated.
This is also true when you donate to a charity individually. It can seem a bit “scary” to donate such a sizeable amount to a DAF. However, if you give regularly to your church, consider a strategy. Add up the annual amount that you give and feel a little more secure that you will give the money to charity.
*you can let the money “sit” in the DAF too long. (this can risk you losing the funds if you wait too long.
Charities and churches can use donations all the time. But you are not required to grant money out of a DAF. Attempting to be consistent in granting money from a DAF is good practice.
With many DAFs, if you do not grant money for a long period, the DAF administrator can liquidate the account. (The administrator then puts the money in a philanthropic account). At Fidelity, the minimum is one $50 donation every three years to keep the DAF active. But as long as you donate regularly, this is not an issue at all.
Final thoughts and further reading
Overall, a donor-advised fund can be a wise strategy both for the person or family doing the giving. It is also great for the charities that receive grants from you.
For further reading:
Brief update and suggestions for current events
It has been a little over two weeks since the World Health Organization declared the Covid-19 crisis a pandemic, and the situation is rapidly changing every day. Early yesterday morning Congress & the White House reached a deal on a $2 trillion stimulus package, with help for businesses, It is expected to be passed within days.
The plan would offer direct payments to taxpayers, an extension of jobless benefits, and $500 billion in help for distressed businesses.
About 90 percent of taxpayers will receive the direct payments. For those with taxable income below $75,000, the stimulus measure will provide a $1,200 check, with an additional $500 per child. For joint filers with income up to $150,000, $2,400. The package phases out for those with incomes up to $99,000 ($198,000 filing jointly). Those above that level will get no money.
If you expect to be in that group, and do not need the money for immediate needs, I strongly suggest you use this windfall, or most of it, to start or increase your emergency fund.
You can read about why an emergency fund is priceless in this post.
I cannot imagine a better use than now to use most, if not all, of a windfall for emergency fund creation or expansion. Putting that money in an online bank that offers a decent interest rate so you can earn some money safely. Here are some suggestions about setting up an online saving account to get a decent interest rate.
