Yes, you read the title right.
We will be significantly cutting back, if not completely eliminating, our monetary donations to charity in 2018.
Jan 11, 2018: I’ve added a slight update to the end of this post
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Our Charitable Goals
For most of our marriage, we have donated without a plan. We donate for holidays, or when people asked as part of fundraisers, or disaster relief (natural or man-made). We have a sense of the type of efforts we want to support, but we did not make systematic plans on how much to donate or when to donate.
That changed around this time last year. To be specific, things changed on November 8th, 2016, with the election.
The election of an anti-Muslim President made us nervous. Even though we are among the relatively privileged in this country because of our income and citizenship (and my wife is Christian), that feeling of being a target was/is there.
So for the first time we elected to donate to something other than an aid organization. We started regular donations to the Council for American Islamic Relations (CAIR) and the American Civil Liberties Union (ACLU) — two advocacy organizations. Put aside your personal opinions on these organizations (many conservatives have low opinions of them) and instead focus on the idea.
While I believe a direct donation to help individuals in need is important and necessary, a donation to try to lift the tide (or stem the hate) across a swathe of society has its own benefit.
With us making those conscious decisions to where we donate, I’ve continued to think on the subject. As I’ve read more about others charitable giving, from physicians and non-physicians, I’ve realized I both want to donate more to charity, and have more of a plan behind our donations.
For that reason, our first step is not donating to charity in 2018.
Instead, we will be opening and funding a Donor Advised Fund (DAF) in 2017.
What’s a DAF?
If you know about DAFs already, just skip to the next section. If not, read this section.
In brief — a DAF is an investment account for charitable donations. When you fund the account, it counts as a charitable donation in the year you donated the money.
Once you put money into the account, it’s no longer yours — while the money is visible in the DAF, and you get to “recommend” when and how the money is distributed, the money no longer belongs to you.
That means you cannot pull the money out once it is in — you can invest it within the account or you can have the DAF donate it on your behalf. If the value grows while it is invested, increasing the value of the account, you do not gain additional deductions/tax advantages for donating more money.
For instance if you put $10,000 into the account, and it grows to $11,000 while invested, then you donate all $11,000, your tax forms show only the $10,000 contribution. You do not get a personal monetary benefit for the extra $1,000, though the charity of course will get to use it.
For those of you who invest money in regular brokerage accounts (i.e. taxable accounts) and hold stocks, bonds, ETFs, mutual funds, etc, the question may be why invest in a DAF at all? Why not just directly donate the securities to charity when you are ready?
That way you hold onto the money and get the full value of any donation, and have access to use it if you want to use it for something else.
A main benefit is you are guaranteed the deduction (if you are eligible to itemize your deductions on tax return) and do not have to worry about fluctuating values decreasing your personal tax benefit. If that $10,000 in a DAF drops to $8,000 and then the DAF distributes that $8,000 to charity, you are receiving credit for a $10,000 donation. Obviously part of the point of a DAF is to have your charitable pot grow, not shrink, so a drop in value reduces your ability to donate.
While DAFs have been around for a long time, I only learned of them this year, reading the wonderful financial blogger Physician On Fire. You should read his first post on the topic here — at the bottom of this article are links to several more articles he has written on the topic. You can also be impressed (as I am) by his recent $100,000 donation.
I also came across this discussion on Bogleheads personal finance forum on the decision to use a DAF vs. a regular brokerage account, so it may be worth reading this (or consulting other sources, such as your CPA/financial advisor if you have one).
My Initial Plan
The DAFs from the Fidelity has a large minimum funding amount of $5,000 — this is tiny compared to the $25,000 required by Vanguard.
While we would likely donate more than $5,000 in 2018, we do not keep $5,000 in cash laying around for such a purpose, instead just taking it out of our monthly budgets. So while we could raid a savings account that was designated for another purpose, I didn’t really favor that idea.
So my initial plan was to stop our automatic/one-time donations in 2018, and start setting aside $500/month into a savings account, and when we reached $5,000, open the DAF.
My Second Plan
The specter of tax “reform” emerging over the past month increased the possibility that our 2018 charitable contributions would provide a smaller (or no) tax deduction than if we did the same donation in 2017.
As my wife began working part-time in 2017, our total income may be (probably will be) lower in 2018. So even without tax reform, the benefit of the tax deduction would be less.
So plan #2 was to go ahead and raid a savings account and donate $5,000 now to fund the DAF to maximize our deduction. In 2018 we would use our tax refund and monthly contributions to restore the savings account.
This ended up not being what we chose to do.
Our Final Plan
In all this I ignored/overlooked the taxable accounts we have open — they are not huge (not even close to the
$3 million $1 million+ held by Physician On Fire), but there they sit. Last year, after the sale of our old house, I invested whatever we had left after moving into our new home and buying a ton of stuff.
Some of it I put into Betterment in a very aggressive allocation (90% equities). We invested right before the election, and to my surprise, the stock market is up 20% since then. While it doesn’t change my opinion on the outcome of the election, I’m still allowed to reap the reward.
I’ve been including this money in our “retirement” and/or “other future big expense” funds, so while I knew that I could “donate” my own taxable investments to fund the DAF, I had not originally considering it as an option, as raiding a “retirement” account for charity is not a recommended approach. However it is not a real retirement account — money in a taxable account is far more fungible. Separating it into buckets is a mental exercise to encourage fiscal discipline, but it’s not always a financial one.
Ultimately, if we’re going to donate $5,000 (or more) to charity, we should do it in the way that is the best for us financially, regardless of where it comes from.
Since the money in the Betterment account has increased 20%, donating from that account spares me paying capital gains tax should I sell the shares and use it for myself. So by shifting shares from Betterment to the Fidelity DAF, we will end up with some tax savings (not huge, as the account is not huge). It also means that our savings accounts, earmarked for short-term expenses, will not be touched.
The amount we are putting into the DAF would be donated to charity at some point in the next 2 years anyway. “Donating” it all right now will boost our tax refund in the spring, and that money can go right back into investments.
Side note — my wife had forgotten this account existed. Even though we’ve been using Personal Capital to do financial check-ins, it’s been focused on monthly cash flow and short-term savings goals. We don’t even look at the investment account balances as they have been earmarked for the distant future. When I pointed out we could fund a DAF with the Betterment account, her initial inclination was that it could buy a really nice recliner. However she also agreed it was the best way to fund the DAF — one of the benefits of “set it and forget it” type investing. You’re not tempted to spend all your money or raid investment accounts.
So with this money being donated to the DAF in 2017, that covers our charitable donations for 2018 and 2019. While we will have the DAF disburse money over that time, we will not be donating. Our “donation” is occurring to the DAF this year, and the recipients will receive it from Fidelity.
While it feels odd to plan charitable giving around saving us money, the system we have is designed to encourage this sort of approach, so I won’t feel bad for using the system as designed. The potential changes to the tax code are designed to stimulate other types of behavior, and the behaviors being rewarded are chosen based primarily on politic views, not much economics or moral codes.
What About the Blog?
This blog has a charitable mission — 10% of all revenue is donated to charity. That will not change (though I have to have ongoing revenue for that to matter).
While I’ve formed a Rogue Dad, MD LLC, I have not gotten around to generating an EIN (tax #) for the LLC, so everything is still being filed under our personal income tax return.
I have not yet decided whether the blog donations will flow through the DAF or be given directly to charity, but either way the plan is to donate the 10% on the same timetable. Even if it goes into the DAF initially, the same amount will be donated by the blog regardless of what happens to the value of the DAF.
I set the Fidelity account to a “moderate” investment allocation, because I don’t really know what the best answer is here. This invests in about 60% equities and 40% bonds.
We aren’t investing $1 million fund to donate over the next 20 years. It’s going to be given away over the next 2-3 years, and while we want some growth and will will put more money into it on occasion, I don’t want a recession to kill my ability to actually have money be given to charitable causes. I’m open to suggestions.
We likely need to make a more formal plan for how/when to give. If we simply donate from the DAF the way we used to donate from our regular accounts, we’ll deplete the DAF quickly. While we still reap the tax benefit now, ideally we will use it to be able to give more in the future.
We’ll almost certainly still make personal donations for very specific things — religious holidays such as Eid, a school fundraiser that only happens once/year, etc.
I am not sure how much we’ll actually disburse from the DAF in 2018, as I would like to let it grow (or at least hopefully not decline), and over time set aside more money to fund it to the point we actually can disburse a reasonable amount from it each year without draining it.
However until I see the final tax reform bill, it’s hard to know the best option, so we’ll have to revisit this in the future.
1/10/2018 Update: Fidelity had significant difficulty transferring my funds from Betterment. Short version — I had ETFs at Betterment with many fractional shares. Fidelity can only take whole #’s, so the fractions caused them significant problems. I had multiple episodes of incorrect information communicated to me from Fidelity and I had to make multiple phone calls and emails to Fidelity and Betterment to resolve it (I even called them out on Twitter). Ultimately the transfer happened on time, but it took 3 weeks and the assets didn’t make it to Fidelity until the final business day of 2017 — 1 day later and I would’ve lost a SIGNIFICANT amount of money (to me) in lost tax deductions. So if you are transferring ETFs/stocks with partial shares, make sure you are on top of this.
What are your thoughts on donor advised funds and charitable giving? Please comment below!