I had heard of these before but wasn’t quite sure how they worked.
I started doing more research and quickly became convinced that I needed to add this tool to my financial life. I just set mine up this past week.
Let me share with you a high-level overview of what these are and how they might benefit you.
What is a Donor Advised Fund?
Let me quote Fidelity Charitable:
A donor-advised fund, or DAF, is like a charitable investment account for the sole purpose of supporting charitable organizations you care about. When you contribute cash, securities, or other assets to a donor-advised fund at a public charity… you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth, and you can recommend grants to any eligible IRS-qualified public charity.
This definition gives at least two of the reasons I’m so interested in DAFs. And I’ll give a third reason from some other research I’ve done.
- You can put money in a DAF, getting an immediate tax deduction, and decide later where you want the money to go. Let’s say you know you want to give a big chunk of money away in December, but you’re undecided on exactly which churches, missions organizations, etc where you want to give the money. But you’re in a bit of a hurry because you want to make the contribution before year-end. Problem solved. You can give to the DAF and then decide later which 501c3s you want to contribute to. But, you still got the tax deduction when you wanted it, namely in the year you put money in the DAF.
- While you’re praying about which organizations to give the money to, it can be conservatively invested while you’re waiting. So, you’ve already gotten the tax deduction, and now the money is growing while you’re deciding how to divvy it up. And if it takes you into the following year to decide, no big deal, because you already got the deduction & the money is growing while you wait.
- Then I realized there’s another great benefit. It’s a tax strategy known as “bunching.” This is beyond the scope of this newsletter, but suffice it to say, “bunching” allows you to take advantage of itemizing your deductions by “bunching” your donations together for several years. For example, let’s say you’ve been increasing in generosity over the years and you give $20,000 to churches, missions orgs, etc each year. Well, after adding in your other deductions, you may find that you still fall under the standard deduction level, so you just take the standard deduction each year. But, what if this year, you gave the same $20,000 you already planned to give plus you pre-give next year’s $20,000. This “bunching” is going to increase your deductions such that you’ll be able to itemize this year and still get the full standard deduction next year (even though you come no where near it due to pre-giving in the prior year). Then, since the extra funds are in a DAF, you can still give regularly throughout the next year, as you typically would, but you got the full write-off in the previous year. This could be a great tax advantage depending on how much you give away each year.
There are a number of DAF providers online, but after doing some research, I chose Fidelity Charitable. I have other accounts at Fidelity & this allowed me to keep them synced together.
To make sure it worked, I made a small donation to the DAF, looked up our church to make sure it qualified (almost all 501c3s do), and it did. Then I simply told Fidelity to donate that money to my church & they mailed a check soon after.
If you haven’t considered DAFs to manage your giving to 501c3s, do some research & see what you think. You may find it’s a great way to manage your charitable donations, while giving you tax advantages & investment returns in the process.
