Are Donor-Advised Funds A Smart Tax Move? Ep #231
Last year, Americans donated $558 million to charities. 69% of those donations come from individuals. They also donated 4.1 billion hours to charities.
If you are someone making a donation to a charity, you need to know how they can help you reduce your taxes. One way to do that is through a donor-advised fund.
What is a donor-advised fund? How does it work? Should you consider using one for charitable giving? I’ll cover the details in this episode.
You will want to hear this episode if you are interested in...
[1:39] Sign up for my newsletter at RetireWithRyan.com
[3:05] What is a donor-advised fund?
[4:51] How is this different from other contributions?
[5:51] Who should consider a donor-advised fund?
[10:15] Who offers donor-advised funds?
[11:05] Pros/cons of donor-advised funds
[12:40] Additional benefits of using a donor-advised fund
[13:27] How to choose the right charity
[14:34] What are your next steps?
What is a donor-advised fund?
A donor-advised fund is an investing account where individuals can contribute money, stocks, or other assets to support charities. Donor-advised funds are set up through a 501C3 organization. They hold an account comprised of the contributions made by individual donors.
Once the donor makes a contribution to the organization, the organization has legal control over the donation. However, the donor’s representative retains advisory privileges with respect to the distribution of funds and the investment of assets in the funds.
When you make a contribution, you don’t have to decide what charity the money is going to right away (or even when you’ll make the donation). The ultimate goal is to donate the growth of the contribution. The benefit is that you’ll immediately get a tax deduction on the contribution you make.
Who should consider a donor-advised fund?
A donor-advised fund may be right for people who are consistently donating money to charities and haven’t been getting a tax deduction.
Currently, you can only deduct donations to charities on your tax return if the donation is $300 for an individual or $600 for a married couple filing jointly (and that’s only if you can itemize the deductions).
These funds can also be good for people with highly appreciated real estate and stocks. You could donate the highly appreciated asset to the donor-advised fund, giving you a large charitable deduction.
The current limit for tax deductions is 60% for cash and 30% for securities and other appreciated assets.
Who offers donor-advised funds?
Vanguard, Schwab, and Fidelity all offer donor-advised funds through their charitable organizations. All three have low-cost investment options within the funds. The annual cost is around 0.6% per year, deducted from the fund. Two of these companies allow your financial advisor—once you contribute a certain amount—to manage the fund for you.
How to choose the right charity
You want to give to a charity that gives as much of your money as possible to beneficiaries. A resource I like to use is Charity Navigator. They score the charity on how the money you donate is managed. Some charities have high administrative costs, so this is important to consider.
Learn more details in this episode of Retire with Ryan.
Resources Mentioned
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