Charitable Giving Donor-Advised Fund: Give more money… for less

This Giving Tuesday, we’re doing our charitable giving through a donor-advised fund, to give more money… for less.

Last year, we set an intention to use the time and money freedom afforded to us by our FIRE lifestyle to give back more to our community. We’ll do this by volunteering, being more generous with friends and family, and giving away more money to the causes that matter to us.

One of my (many) formal goals for 2022 was to open and fund a donor-advised fund for charitable giving.

I was initially inspired by Jenni and Chris, who blog at Tic Toc Life. They set up a donor-advised fund and contributed a year’s worth of expenses after reaching financial independence. Each month, readers vote on charities and they make donations from the account using the 4% rule. I loved this idea.

Going into 2022, we expected this year to be our highest income year ever. Mr. RFL received a large grant of company stock, which has appreciated significantly over the past few years.

Having this excess cash flow seemed like the perfect opportunity to make a large contribution into to a donor advised fund and simultaneously reduce our tax bill for the year.

So, we decided that this year we would contribute at least $40,000 to a donor-advised fund. We chose this amount because it represents one year’s worth of expenses in our expected FIRE budget.

Technically, we set a stretch goal of $50,000, but I accidentally used too much cash to “buy the dip” this year, so we’ll likely end up on the lower end of that range. We’ll make one final contribution based on how much excess cash we have at the end of December.

What is a charitable giving donor-advised fund?

A donor-advised fund (or “DAF”) is a charitable investment account that is used to fund charitable organizations you support, both now and in the future.

You can make a charitable contributions to your giving account at any time. You are allowed to deduct the value of the money or assets you donate on your taxes in the year you make the contribution.

Additionally, you can invest your donations within the fund. This allows the money to (potentially) grow tax-free until you’re ready to grant money to the charitable organizations of your choosing.

What are the benefits of donating through a donor-advised fund?

Save money on your taxes

One of most attractive benefits to using a donor-advised fund for charitable giving is the tax savings.

This type of account has historically been popular with the ultra wealthy. However, it became more attractive to the general public when the 2017 tax law went into effect.

Tax deductions for charitable contributions are only available for itemized tax returns. When the standard deduction nearly doubled as a result of tax reform, it became a high hurdle to clear. As a reminder, the standard deduction for 2022 is $12,950 for individual filers and $25,900 for married filing jointly.

Because the standard deduction increased and certain itemized deductions had limitations placed on them, such as the $10,000 SALT cap, far fewer tax filers have itemized deductions since the tax law went into effect. This also means that fewer households have been able to receive a meaningful tax benefit for their charitable contributions.

Some people scoff at the idea of trying to strategize your charitable contributions to save on taxes. They say it’s selfish. I don’t understand the accusation. Giving is an unselfish act. Trying to structure your giving to reduce your tax burden is just smart tax planning. In fact, it leaves you with MORE money available to donate to charity. We’re giving more than we otherwise would because of the tax savings. I suspect many other families do as well.

Donor-advised funds are an effective way to bunch charitable contributions into a single year for the tax deduction, without giving away all the money at once.

Instead, you fund the account and take the deduction in one year, and then can allocate out the funds to charities in the amounts and over the time period that works for you.

Donations grow tax-free

Another benefit of donor-advised funds are that you invest donations, which can grow tax-free while you decide where to donate your money. Or, if you’re bunching multiple years worth of charitable donations and don’t want to give it away all at once, like us.

This is beneficial because you won’t owe taxes on any gains or interest that money earns while you wait. All the earnings can go to the charities you chose.

The first contribution we made into our DAF earlier this year was $10,000. By the time we made the second contribution, that money had already grown to $10,700 (or 7%).

Don’t forget that when dealing with investments the value can go up OR down. If you’re giving timeline is short, you may want to chose more conservative investments. Because we’re planning to give over a longer period of time, we’ve elected to invest at roughly a 70/30 split (stock/bonds).

Donate appreciated stock or other financial assets

Brokerages offering donor-advised giving accounts typically allow you to contribute a variety of financial assets.

Most charities are only equipped to handle cash donations. However, with a donor-advised fund, you can donate appreciated stock, mutual finds, restricted stock, privately held business interests, life insurance and more.

This is a great option for anyone who wants to contribute, but would have to liquidate investments (and pay taxes) to do so. Instead, you can donate appreciated assets to the fund without triggering a tax assessment.

We just donated cash this year, but this is something we’ll consider for future donations.

Simplify record keeping for tax purposes

If you donate to multiple charities, it can be a hassle to collect and track your receipts for tax time. Using a donor-advised fund to make a tax-deductible contribution simplifies that process. You’ll get one receipt at the time you make your contribution. No further work is required on your part. Additionally, when you make donations from your account to charities, the broker will maintain all the records in your account.

Cons of charitable giving using a donor-advised fund

Donor-advised funds are not for everyone. Whether or not this is a good option for you, depends on your financial situation and giving style.

It’s important to note that although you can control how the money is invested and where it is donated, once you contribute to a DAF, the money is no longer yours. There are no take-backs, so only contribute the amount you want to irrevocably promise to charity.

Limitations on where money can be donated

One of the biggest cons with this type of account are the limitations on where your money can be donated. You can only make grants to 501(c)(3) nonprofit organizations.

This means that you won’t be able to use the fund for informal donations, such as to fundraisers, panhandlers, generous tips, or presents for the family you “adopted” at the holidays.

It also limits the number of international charities you are able to donate to. Though, there are several intermediary charities and US-registered charities that support international causes.

That said, many of the charitable organizations, religious organizations, and schools you already support probably qualify.

While the majority of our giving each year is to charitable organizations, we will continue to give informally from our bank account for other causes during the year.

There are minimums

Another set-back of donor-advised funds is that they typically have a minimum initial contribution amount and a minimum grant amount.

This amount will vary depending on the brokerage firm with whom you chose to open your account.

For example, you’ll need to contribute at least $25,000 to open a Vanguard Charitable Account. Additional contributions must be $5,000 or more, and the minimum grant that can be made to any charity is $500.

Fidelity has much lower limits for charitable giving, which is the primary reason we decided to open our donor-advised fund account with them. With a Fidelity account, you wont have any minimum balances and grants to charities can be as small as $50.

Fees

Nothing is free. You’ll have account maintenance fees each year for your donor-advised fund.

At Vanguard and Fidelity, these fees will be around 0.6% of the balance each year for most people. For a $40,000 account, that’s $240 per year.

While it always sucks to pay fees, this cost should be much less than the benefit of your initial tax savings and the tax-free growth on your donations, in many cases.

How we’re giving more and saving big this year

By contributing to a donor-advised fund this year, we’re not only committing to making meaningful charitable contributions in the future, we’re saving big on our taxes.

Contributing $40,000 will save us $9,950 on our federal and state tax returns this year!

If we are able to squeeze out $50,000, the tax savings would be over $13,000.

In either case, we’ve still given away all that money, but I’d rather have it go towards charity than to the government.

While Mr. RFL is still working, we’ll use our donor-advised fund to supplement our regular giving. Arizona offers an $800 tax credit for charitable contributions made to qualifying organizations, so we’ll at least continue to do that each year outside our DAF each year, in addition to our informal giving.

Mr. RFL will have to cash out his remaining stock options once he retires, so we expect that will be another high income year. In that year, we plan to make another large contribution to our donor-advised fund (if the tax law hasn’t changed).

When we’re no longer working, we’ll use our donor-advised fund to make annual donations following the 4% rule as a guide. It will allow us to finally put the 4% rule to the test and see if the portfolio outlasts us. I suspect it will.

What’s your favorite way to give?

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