[Editor’s Note: This is a republished post from Physician on FIRE, a member of The White Coat Investor Network. The original post ran here, but if you missed it the first time, it’s new to you! This one is about how to give to charity through a donor-advised fund. Shout out to the Physician on FIRE because today is his birthday! Last year on his birthday he celebrated by throwing down $100K to his DAF. Amazing way to give to the Red Cross, Salvation Army, a soup kitchen, animal shelter, church, your alma mater, or whatever charity of your choice!]
The Donor-Advised Fund, a Smarter Way to Give
- You get a tax deduction in the year that you donate to the fund that you control.
- You can give from the fund to charities of your choice years later.
- You can donate equities that have appreciated and nobody owes capital gains tax.
- Your donated money can remain invested in index funds.
I started my first DAF several years ago when I had large capital gains and wanted to bring my taxable income down. I had some T. Rowe Price funds that had sizeable gains and I donated them to start my DAF with the T. Rowe Price Fund for Charitable Giving. A couple years later, as I learned more about investing and fees, I realized I would probably be better off keeping my dollars with Vanguard. So I moved my taxable account to Vanguard and my DAF to Vanguard Charitable. When I realized that the minimum grant from Vanguard Charitable was $500, I opened another DAF with Fidelity Charitable, which allows donors to give as little as $50 at a time. Over the last five or six years, I’ve opened three separate DAFs, but only two remain funded. I use Vanguard when I am donating a grant of $500 or more and Fidelity when I wish to grant $50 to $499 (not that I’ve ever given $499).
My Donor-Advised Fund Planearly retirement is the fact that I’m giving up the potential to continue earning money that could be used for the greater good. I should have more than enough money for my family and I when I retire, but if I kept working, great things could be accomplished by donating those future earnings. I’m not talking Bill Gates or Warren Buffett kind of money, but $10,000 here and $20,000 there could make a noticeable difference locally. I plan on using my DAF to eliminate that mental hangup. I treat it a lot like I treat my retirement nest egg. I will keep working until it is large enough to satisfy my desires. Currently, my combined DAF balance is just over $200,00 and I plan to boost it to $250,000 this year (my last year with mostly full-time anesthesia income since I am now part-time) in accordance with my Investor Policy Statement. I don’t think I will walk away feeling guilty knowing that every 10th day’s income in my abbreviated career ended up going to charity.
Rules of Donor-Advised Fund Giving
When donating appreciated mutual funds, as I do, you are limited by IRS rules to giving 30% of your adjusted gross income in any given year. When donating cash, you can give and deduct up to 50% of adjusted gross income.
I also plan to donate half of any proceeds from this site to our DAF as part of my site’s charitable mission. When the DAF is fully funded, I will continue to treat it like a nest egg, donating around 4% or 5% per year, perhaps more when market returns are good. I should be able to make it last indefinitely if I’m careful, and I can give big with what’s left towards the end of my time on earth. How much does it cost to put $100,000 into a DAF? This is not a trick question, but it does depend on your marginal tax rate. If you live in a state with state income tax, at a physician’s salary, your marginal tax rate is probably in the 35% to 50% range. Donating $100,000 will reduce your tax liability by $35,000 to $50,000. If you are donating appreciated mutual funds like me, you will avoid capital gains (15% or 20% plus state income tax plus 3.8% ACA / NIIT surtax for most high-income professionals). If the $100,000 donation has a cost basis of $50,000 (you bought years ago and the fund has doubled), you’re saving about 25% of the $50,000 gain by avoiding the capital gains, so that’s an additional $12,500 saved on taxes in the year you donate (as compared to selling the fund and paying capital gains. Of course, there are other ways to reduce or avoid capital gains taxes. So… how much does it cost? It depends on the situation, but for me, it costs about $58,000 to donate $100,000, and that’s without factoring in the potential savings in capital gains.
Downsides of a Donor-Advised Fund
Are there drawbacks to using a donor-advised fund? Sure. You can’t take it back. A card laid is a card played. As with any charitable giving, once you give, the money is no longer yours. You will retain the ability to direct where the money goes from your fund as long as it goes to a bona fide 501(c)(3) charity. Also, there are minimum donations to open an account, and minimum grant amounts when you give from your fund. If you go years without giving at all, the Fund can choose to donate for you. If the parent company goes belly up, the money could disappear with it (this happened to the National Heritage Fund in 2009). Another drawback that deserves mention is that building up a DAF as I plan to do will obviously delay your retirement, or at least delay reaching your retirement goals. It will take me an extra year or so to reach my goal numbers for an early retirement, because I will be diverting funds to charity. It’s a choice that I believe will make me feel more comfortable leaving the medical profession well before my 50th birthday. As I mentioned above, I now have two DAFs. The Vanguard Charitable Fund makes it easy to transfer funds from my taxable account to my giving account. I have a Fidelity Charitable account so that I can make grants as small as $50. Both have a variety of investment options with low fees, and make it easy to make grants when you wish. Both have an additional annual expense of 0.6% (or $100 with Fidelity, whichever is higher). These fees are comparable to the tax drag one would see if the money were kept in a taxable account (2% dividends taxed at 30% = 0.6%).