September 12, 2022
Question:
As the end of the year approaches, I’m starting to think about making charitable donations and I recently read about something called “Donor Advised Funds,” but I’m still not entirely clear how they work. Are they a good solution?
Answer:
For those not familiar with Donor Advised Funds (DAFs), it is a special type of account that can be used to donate to qualified charitable organizations.
The primary benefit of this type of account is that you can gift securities in kind (meaning you don’t have to sell a security, recognize the gain, then gift the cash) to the DAF account and take the tax deduction as if it was going to a charity.
Some people do this because they want to itemize on their tax return every other year by “cycling” deductions, meaning they make larger charitable contributions every other year so they can itemize on their taxes, but on off years they only take the standard deduction.
These accounts can then dish out the donations in future tax years.
So, you make the contribution in one year, but it doesn’t need to be distributed in that same year.
The funds can stay in the securities you donated, or you can invest in other strategies. When they are sold to make the donations, there are no tax consequences.
If you are interested in this type of strategy, the top three providers we recommended are Vanguard, Fidelity and Schwab. When investigating which one is right for you, ask about management and administrative fees.
Do your friends ask you financial questions?
Pass those questions on to us at AskRPG@rootedpg.com and we will feature them in our future newsletters.