My current job is high income/ high tax. I would expect in the majority of circumstances, my tax burden to be reduced in retirement.
The Donor Advised Fund – like any regular donation will offset my current tax burden.
The DAF grows tax free as long as it is put towards philanthropy.
My thinking is that I reduce my tax burden now instead of when I'm living off my investment assets and could potentially donate a lot more to a specific cause when I retire.
Has anyone used a Donor Advised Fund? Do they make sense if your vision of retirement includes any philanthropy?
byu/ArkGuardian inpersonalfinance
Posted by ArkGuardian
6 Comments
You can front end load your giving by starting out a DAF with (say) 5 years of anticipated giving. That would make it more likely you would exceed the standard deduction in year 1 so you’d itemize with your DAF plus mortgage interest, property taxes etc. give away 20% of the money in year 1 and the same amount years 2-5 where you would take the standard deduction.
We used a DAF, but now, as >70.5 retirees, we use Qualified Charitable Distributiins from our tIRAs.
Definitely set up a DAF now while you are in a high tax bracket. The key is to directly fund it with highly appreciated stocks or index funds. Don’t sell them and incur capital gains tax; instead, donate them into the DAF. No tax on the sale of the stocks, tax deduction for the current market value. Then in the DAF, invest (likely in index funds), and the gains will be tax free. So select the beneficiary to be a charity, so that your charitable intent is implemented on your death.
Yes, find your local community foundation. Transfer highly-appreciated assets to fund a DAF. Start getting involved with the community foundation and find some local organizations in areas you care about. Tax planning and retirement activities in one stroke!
I recently started using Daffy since they have lower fees than traditional DAFs, particularly if you want the money in the account to grow over time (by investing in index funds). Instead of a percentage fee, they charge a monthly fee starting at $3/month (under $25k in contributions per year, which is a pretty large annual donation for most folks). One caveat is that Daffy is a startup, so something to consider if you’re giving them a large amount of money.
It’s worth noting that the recent tax bill (the “big” one) made some changes to charitable contributions that change the math for taking deductions somewhat.
* There’s now a “floor” of 0.5% of AGI on deductions, meaning that if you make $150k then the first $750 of donations you make per year are not tax deductible.
* The standard deduction was increased, meaning that unless you have other itemized deductions (SALT, mortgage) it might make less sense to itemize in a given year
* There’s a new $1000 “above the line” deduction for charitable contributions even if you take the standard deduction, but it does *not* include donations to DAFs.
Given all that, it could make sense to lump your donations together so you make a really big donation to a DAF in one year, and zero in other years, to optimize the tax benefits. You can then make smaller annual distributions to your charities from the DAF. Of course, if you make enough every year that the “floor” and standard deduction aren’t a big deal, and feel generous, you could still just donate to the DAF every year.
Also worth thinking about if you want to make donations in 2025 before the new rules for 2026 take effect.
I’d think it only makes sense if you need to offset some unusual amount of income in a year to get your tax bracket down beyond what you can contribute to your 401k. Otherwise in retirement you can use QCDs to contribute some or all of your RMDs so they do not add to your taxable income.