Posted by Gradual Millionaire on February 16th, 2016
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:
There are also some major benefits to this approach:
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.