5 Reasons To Set Up a Donor-Advised Fund Today
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#60 – Is charitable giving one of your goals during retirement?
If yes, then this episode is for you.
Today, we’ll help you make your charitable contributions more tax-efficient. We believe that the more money you save in taxes, the more money you can donate to your favorite charities!
One of the best tools to help you maximize your charitable tax deductions is a donor-advised fund.
In this episode, Jeremy Keil takes a deep dive into what donor-advised funds entail. Through an extremely simplified explanation and the use of multiple examples, Jeremy helps you understand the key benefits of donor-advised funds and why they are highly effective under the existing tax laws.
Jeremy discusses:
- How you can claim the tax deductions for future charitable contributions today
- Reasons to give away appreciated assets, such as stocks, instead of cash
- The process of setting up donor-advised funds (including the entities and fees involved)
- How donor-advised funds make it a lot easier to track your tax deductions
- And more
5 Reasons To Set Up a Donor-Advised Fund Today
1) Maximize Your Itemized Tax Deductions
Recently, the standard deductions were nearly doubled.
As of 2021, the current standard deductions limit is $12,550 for individuals and $25,100 for couples. If you’re 65 or older, this amount increases by $1,350 ($2,700 for couples).
Unless your charitable contributions and other deductions exceed these standard deductions limits, you’re unable to use any of your itemized deductions!
This is where donor-advised funds can help you. You can deposit a large lump sum amount into these funds and get a big tax deduction in one year. Then, you can have money sent out to different charities every year from your donor-advised funds.
For example, if you wish to donate $15,000 per year to a charity for the next 2 years, you can deposit $30,000 into a donor-advised fund in the first year. This way, you exceed the standard deductions limit and increase your itemized deductions!
The fund could then automatically send $15,000 per year to your favorite charity. The charity gets the same amount of money at the same time you had planned on, but you get the itemized deductions all up front in the first year.
2) Track Your Charitable Contributions Easily
Do you usually make multiple charitable contributions throughout the year?
If yes, then you might need to remember the amount of each contribution and whom you gave it to, and perhaps even maintain their receipts.
Well, you won’t need to do that in a donor-advised fund. The only transaction you need to remember is the big lump sum payment!
After that, the transactions from your donor-advised funds to different charities do not affect your taxes.
Some donor-advised funds also provide easily accessible reports of where your fund money is being used, if you ever feel the need to look at it.
3) Grow Your Charitable Funds Over Time
The money you deposit into a donor-advised fund doesn’t just sit there earning 0%.
The foundations holding your funds manage your money. Therefore, they have the potential to grow over time.
For lower management fees (nearly 0.6%), you can utilize large foundations such as Vanguard, Fidelity, or Schwab.
Alternatively, you can also utilize smaller foundations such as National Christian Foundation or Thrivent Charitable. Although these foundations charge higher management fees, their services are more personalized and you might find the added cost to be worthwhile.
4) Easy To Set Up
Most foundations don’t charge any initial fee to set up a donor-advised fund, but only the ongoing management fees.
Donor-advised funds are also much more simple to set up compared to private foundations.
Private foundations often have more stringent rules and regulations, with greater administrative needs and mandatory public tax filing.
So, if you’re thinking about starting a private foundation, consider donor-advised funds first!
5) Beneficial During High-tax Years
Retirement is often a high-tax year for many people.
If you don’t want to be burdened with a lot of taxes right after you retire, you can make a big lump sum payment into donor-advised funds.
This strategy to reduce your overall tax rate works for any year when you’re expecting a higher-than-usual taxable income.
Pro Tip: Consider Giving Away Appreciated Assets Instead of Cash
Remember, cash is not the only way to give away money to charities.
You can also donate appreciated assets –– such as stocks, real estate, mutual funds, exchange-traded funds, etc.
If these assets have been growing for over a year, giving them away can save you from long-term capital gains taxes!
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Make sure you check out the resources below to learn more about tax-efficient charitable giving using donor-advised funds.
If you have any questions regarding your retirement, investment, or tax planning, feel free to contact us!
Resources:
- Retirees, Get an Upfront Tax Break for Delayed Charitable Giving
- Kiplinger Charitable Giving Guide
- Vanguard Charitable
- Fidelity Charitable
- Schwab Charitable
- National Christian Foundation
- Thrivent Charitable Impact & Investing™
- 3 Things You Should Know Before Choosing A Financial Advisor
- 6 Questions Retirees Aren’t Asking But Should Be
- Subscribe to Retirement Revealed on Google Podcasts
- Subscribe to Retirement Revealed on Apple Podcasts
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