In a previous post, Double Your Donations for Free, I talked about how you should check if your employer has a gift-matching program for donations made to nonprofit organizations. While I’ve been taking advantage of this program for giving to certain organizations, I forgot to include the caveat that some employers’ gift-matching programs only match donations to certain qualifying types of nonprofit organizations.
In my case, my local church does not qualify under the criteria that are set for the matching program. I can still get matches to many parachurch humanitarian aid organizations like Compassion International, but the 10% of our income that we give to our church each month can’t be matched. The criteria are put in place to keep matching funds in line with the employer’s legal requirements, which I certainly understand, but nevertheless it’s a bit disappointing to see a significant amount of money go unmatched.
Then, I started reading about donor-advised funds and realized I might have found a workaround for my problem.
You can open up a donor-advised fund (DAF) with most of the big investment companies that you might have your IRA or 401k with. This fund is essentially an account containing a mutual fund to which you contribute funds and from which you have the ability to write “grants” (i.e. donate money). Because the fund is technically housed inside a 501(c)(3) organization by the investment company you chose, contributions to your fund are tax-deductible in the year that you make them. You can then make donations from your fund to any other legitimate 501(c)(3) nonprofit organization, such as a church. Some DAFs have additional restrictions, so you’ll want to read the guidelines carefully, but most that are run by the big investment companies are extremely loose. As long as the organization is a legitimate nonprofit recognized by the IRS, you should be good to go.
There are some things you should be aware of:
- The lowest minimum to open a DAF with any of the companies I’ve found is $5000
- Sometimes there is a minimum percentage of funds you have to “grant” from your account each year, or a minimum balance above which you must stay each year to keep it open.
- Contributions to the account are tax-deductible in the year that you make them, not in the year that you distribute money to an organization.
There are also some major benefits to this approach:
- All of your donations to nonprofit organizations are made under this account, so when tax season comes you only need your form from the donor-advised fund. You don’t have to worry about getting documents from all the different organizations you donated to at the end of the year.
- You can take the tax deduction in the year it’s most beneficial to you, while donating money to an organization when it is most helpful for them. For example, if you knew an organization was going to need money next summer, but you know you’re facing a higher tax bill this year, you can contribute to the DAF this year, but grant money to the organization next year. Win-win!
- Donor-advised funds make it easy to donate stocks and other more complicated assets that most organizations like churches don’t have any way to handle. The company handling your DAF deals with liquidating the asset and you get cash in your fund to donate. You get to avoid capital gains tax on assets such as stocks that have appreciated and you avoid hassle.
- You can choose what type of mutual fund to keep your contributed money in until you donate it. If you want to keep it in a mostly-cash mutual fund to minimize risk, you can do that. If you want to try to grow the money by allocating some of the money to stocks/bonds before donating it, you have that option as well.
- You’re likely to be more intentional and thoughtful about giving than you otherwise would be.
- You can give family members or friends, including children, the ability to write grants from the fund.
- Your company might match donations to your donor-advised fund, while they might not match donations to certain other organizations.
That last point is the primary reason that I am planning to open a DAF. I can route my contributions through my DAF to my church and take advantage of the employer match in the process.
My wife and I will set aside our tithe (10% of income) into a separate savings account throughout this year. Once we get up to the minimum $5000 needed to open a DAF account, we’ll open it up and request a company match. After doing so, we’ll immediately have a fund containing $10,000 from which we’ll make our donations to our church and other organizations.
When I first heard about donor-advised funds, I had a lot of questions, since they’re not talked about very much in the personal finance blogosphere. Feel free to leave any questions you may have in the comments and I’ll be happy to answer them as best as I can.