WEBVTT 00:00:01.840 --> 00:00:42.110 You've got certain assets that you can give, whether that's in a taxable account or you've a bunch of cash on hand, and maybe you want to pair that with a Roth conversion, or if you know you're going be charitable for the next five, ten, fifteen years, maybe doing those donor advised funds and contributing it all in one year, that might can help you save a ton of taxes over the next few years. Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place. Hey there, my name is Jacob Duke, and each week, I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show. 00:00:45.865 --> 00:01:07.380 Hey friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke as always. So I've gotten a lot of questions lately about charitable giving, but more specifically, donor advised funds. Because it's the Christmas season and in the spirit of giving, which I can't believe that it's the last time we're actually going to be talking together before Christmas. So Merry early Christmas. 00:01:07.620 --> 00:01:30.240 I wanted to dive into donor advised funds and how you can use this charitable giving strategy to both save yourself on taxes, but also give more to the churches or charities that you love. So today I'm gonna be sharing what they are. I'm gonna share how they work. I'm gonna share why you would use them. And then I'm gonna walk through an example or two of how this account can save you thousands of dollars in taxes. 00:01:30.640 --> 00:01:53.455 So this should be a fun episode, but before we jump into that, I wanted to remind you about the listener survey that I would like you to fill out for me. This is a way that I can gather feedback from you, the listener, and continue to make the show better here in 2024. So I'm always looking for ways to provide you with better or more concise tips or ideas around retirement planning. That's the whole purpose of Retirement Answers. So there's a link down in the description below. 00:01:53.455 --> 00:02:04.140 I'd love for you to click that link. It'll take you to a survey. It will only take a couple minutes for you to fill out. So if you would go ahead and fill that out for me. And I'd love to hear your feedback to help make the show better here in 2024. 00:02:04.300 --> 00:02:27.520 Next, I wanted to highlight this week's listener review. It comes in from mom of three teenage girls and she gives the show five stars. And she says, I just stumbled across this podcast and I listened to everything for the whole last year and a half. Very good information, a very clear explanation, and I will be, definitely a future listener. I'm 45 and wanting to retire next year, so this information is helpful for me. 00:02:27.840 --> 00:02:57.680 So thank you so much for that review, that feedback, and I'm glad that you're finding the show valuable. As always, if you're enjoying the show, I would love a review there on Apple Podcasts and, Spotify. And so that's really helpful for me to know that I'm doing a good job, but also it helps other people find the show. So with that, let's go ahead and jump into everything that I think you need to know about donor advised funds. Now, I always like to say this on the front end, but I don't advise my clients to open a donor advised fund and start funding one simply to save on taxes. 00:02:57.680 --> 00:03:31.100 What I tell people is that if you're charitable already, or if you plan on giving here in the future, then you can use this donor advised fund and do some proactive tax planning in a way that could be beneficial for you. But then also it could make sense for the charity that you're giving to because they would then ultimately receive more money. So I like to start with by saying that and say, look, don't just use this only as a tax strategy, use this as a tax strategy if you're already giving. So with that, let's just kind of dive into the basics here. Many of are probably wondering, hey Jacob, what is a donor advised fund in the first place? 00:03:31.100 --> 00:04:02.270 Well, just to keep it simple, it's just an account that's used purely and exclusively for charitable giving. So you can add money to the account and then either give those funds to a charity immediately, or you can do it at any point in the future. Now, there are some important facts you need to know about donor advised funds and here are a few of them. Just know that your contributions whenever you add money to that account type, those are irrevocable, meaning you can't get the money back out of the donor advised fund once you add the money to the account. So that's number one, they're irrevocable contributions. 00:04:02.750 --> 00:04:40.425 Next, you can contribute as many types of assets as you'd like. So this typically includes cash, stocks, bonds, non publicly traded, assets, maybe business interests or cryptocurrencies and so on. So most asset types that normal people would have kind of like you and me, they're going to be able to be contributed to a donor advised fund and used for that purpose. Now, one of the biggest benefits of the account is that you can get an immediate tax deduction in the year that you make the contribution. So this deduction offsets your normal income, and we'll dive into an example of this here in just a few minutes to really show you how this works in action. 00:04:40.665 --> 00:05:05.075 But just know that whenever you make a contribution to a donor advised fund, you are able to deduct that from your normal taxable income the year in which you do so. So we're gonna walk through that example in a second. Also the money or the assets that you add to the Donor Advised Fund, those can be invested and they can then grow tax free into the future. So let's say you put $20,000 into a donor advised fund right now today. Well, you can invest that money. 00:05:05.075 --> 00:05:37.295 Let's say it doubles over the next seven to ten years. You can then take $40,000 and then give that tax free to the charity of your choice. So that's a unique part of this is you can actually invest the money inside of the account and then delay your giving or your charitable contributions to the charity you're trying to give to. You can delay that into the future and then do it at a larger dollar amount because you were able to invest those funds. Now, of the big questions that a lot of people are asking me is, you know, why would I use a donor advised fund instead of just giving to the charity like normal? 00:05:37.295 --> 00:06:17.070 Or when would be a good time to use this type of tax or giving strategy? Well, the first good time to do this whenever you have a random or I guess an irregular high income year while you're working. So let's say your normal salary is $100,000 but for whatever reason, maybe you got a bonus or something happened where you earned $200,000 this year. Well, if you're normally giving, let's say 5 or $10,000 to a charity, you can take the additional $100,000 you earned this year above your normal earning cycle. You can take that, contribute to a donor advised fund to write off the full $100,000, which means your taxable income is gonna be your normal 100,000 you're used to. 00:06:17.390 --> 00:06:46.420 And then now you've got charitable giving that you can do over the next, I don't know, five to ten years out of the donor advised fund. And now you're you're actually benefiting from a tax standpoint in that way. We're gonna dive through an example of that exact situation here in just a second. Now, another time that you can use, the donor advised fund is whenever you have really highly appreciated stock holdings or positions, And you don't plan on, I guess using that or realizing those gains and paying the capital gains tax on it. So what would you do in this situation? 00:06:46.420 --> 00:07:38.860 Well, if you let's say bought Apple stock and you had a $100,000 worth and now it's worth $800,000 for example, we've got $700,000 of gains built into those holdings. Maybe you don't wanna pay the taxes on those, maybe you're never gonna realize that. Well, you could just take a portion of that or all of it, let's say, you could dump that into a donor advised fund, and now you just eliminate the tax bill for yourself and then also you're gonna fulfill your charitable giving, desire. So that's another way or another time that you can use a donor advised fund. And then finally, idea around when you could use these giving strategies using a donor advised fund is when you're doing a Roth conversion and you're intentionally trying to line up the timing on that to where you do a Roth conversion and a donor advised fund contribution in the same year so that they offset each other and you're not actually going to end up paying taxes on the Roth conversion. 00:07:38.860 --> 00:08:08.230 So those are just a few different times when it might be wise to consider using a donor advised fund to your advantage. Okay, so let's go ahead and walk through an example together to really make sense of this and try to explain this to you. So I'm gonna try to slow it down and just really make it as simple as possible. So let's say that we've got a couple, we've got Matt and Diana, they're both working and they're making $160,000 combined that their total household income this year. And since they're married, they're gonna be filing their tax return jointly. 00:08:08.230 --> 00:08:41.200 So let's assume that they're giving, let's say $16,000 a year to charity. And that's 10% of their income just to keep round numbers here. So they make 160 and they're giving 10% which comes out to be $16,000 They're also filing jointly on their tax return. Most people in this situation are probably gonna be using the standard deduction rather than itemizing since the standard deduction is fairly high. So we're gonna assume that this couple, Matt and Diana, they're using the standard deduction, which in 2023 is 27,700 Now, I'm gonna just keep it really simple here. 00:08:41.200 --> 00:09:20.505 I'm gonna round up to 28,000. So we're gonna assume that $28,000 is the standard deduction for the rest of this conversation and example. So just know that I understand that's not actually the standard deduction, but we're gonna keep it simple and use round numbers. So just to kind of restate things here, we're giving $16,000 to charity, but since their total deductions on that $16,000 plus let's say mortgage interest or any other items do not exceed the standard deduction, they're essentially giving the $16,000 and they're not getting any additional tax benefits from those gifts. Now, to be clear, again, I don't recommend people just give simply for tax deductions. 00:09:20.505 --> 00:09:43.445 I recommend giving out of the goodness of your heart because it's something that you wanna do. And if you can benefit from a tax kind of planning strategy, that's what we're walking through here. But don't just give simply for tax benefits. But if Matt and Diana don't do any charitable giving, they're still gonna use the standard deduction like normal. So there's really no tax benefit of them giving the $16,000 because they're gonna end up using the standard deduction regardless. 00:09:43.605 --> 00:10:16.765 So they're not getting the standard deduction plus that $16,000 to $16,000 that would have to eclipse or be greater than the standard deduction in order for them to itemize and make itemization make sense for them. So how would a donor advised fund be helpful in this situation? Well, I guess they could donate the $16,000 to the donor advised fund and then give it to the charity right away, right? Well, they could, but it still wouldn't really help them. They'd be back in the same situation as I just explained where the gift does not exceed that standard deduction and, they would just kind of be back in the same spot. 00:10:16.765 --> 00:10:37.225 There's no benefit to adding just $16,000 to the Donor Advised Fund and then immediately, taking that out and contributing it or giving it to the charity. But here is an idea. What if they donated more than $16,000 to the Donor Advised Fund at one time? Would that help? So let's say that they can donate $32,000 this year instead of 16. 00:10:37.225 --> 00:11:28.855 So this is double their normal gift and $32,000 is more than their standard deduction of $28,000 by about $4,000 So now this gives them the opportunity to itemize and deduct more than the standard deduction from their income. So by donating this year's giving and next year's giving in this one singular tax year, they're able to write off an additional $4,000 from their income this year. But here's the cool part. They can take $16,000 from the donor advised fund this year after they make the $32,000 contribution to it, And they can give that to the charity like they normally would. They can let the additional $16,000 that's left over in the donor advised fund, they can let that grow for one year and then give it to the charity next year at perhaps a higher amount than 16,000, because remember they can invest the money. 00:11:29.335 --> 00:12:03.735 So that's a cool feature of the donor advised fund. But wait, there's more. And I kind of feel like an infomercial trying to sell you a mop or something when I say that, but because they are doing itemization this year on their tax return, they get to write off a larger amount this year, but next year they still get to use their standard deduction like normal, even though they didn't give any additional funds. So do you see what just happened there? By donating multiple years worth of charitable gifts, they're gonna save a larger amount of taxes this year and they're still gonna continue to use their normal standard deduction next year like they always would anyway. 00:12:04.130 --> 00:12:31.045 And all the while they're still getting to meet their charitable giving desires both years. So here's a little bit of math for you on this. If they don't do the donor advised fund, they're gonna earn $160,000 this year and next year. And if we subtract out the standard deduction for each of those years, their taxable income both years would be $132,000 for a total of $2.64 over the next two years. Now, look, I realize there are other things that could change these numbers slightly. 00:12:31.045 --> 00:13:00.560 So please don't email me saying I forgot to factor in an IRA contribution or something else. That's not the purpose. The goal is simply to explain the concept that way you can understand this and then go apply it to your situation and use this knowledge to your advantage. So that's $264,000 of taxable income that they're gonna have over the next two years with that standard deduction. Now, if they do a donor advised fund, like I just explained, they can have a taxable income of $128,000 this year, which is 160 minuteus 32, since they're gonna be itemizing that amount. 00:13:00.800 --> 00:13:32.070 And then next year they would have, the standard deduction like normal, which means their taxable income would be 132,000. So by doing the donor advised fund, their taxable income over the next two years is now going to be 260,000 instead of 264,000. So they're not gonna pay taxes on $4,000 of their income over the next two years by doing this strategy. And at 22% that saves them $880 on taxes. And, you know, I know what you're thinking, Jacob, that's not much in tax savings. 00:13:32.310 --> 00:13:57.195 And I'd have to agree with you. It may not be worth the trouble of doing it if we're doing it at that dollar amount or only be able to save $880 in taxes over the next two years. But now that we know how this works, let's take it to the next level. Let's say that everything's the same, but Matt and Diana have $200,000 in a brokerage account or a cash account. And this could be from their savings, it could be from an inheritance they just received or any number of other things. 00:13:57.810 --> 00:14:45.085 Regardless, they've got the investments in a taxable brokerage or a bank account. So what if they use some of that brokerage account to fund their charitable giving over the next five years instead of just doing two years worth. This means that instead of giving 16,000 over the next five years, just like a normal annual, gift and doing the standard deduction, they would itemize this year and take the full $80,000 deduction in this tax year and the following four years, they would use their standard deduction like normal. So this is gonna lower their taxable income over the next five years way more dramatically than the previous example I just gave using only a two year charitable gift. Now we know that the standard deductions, we know their income, all these other things are probably not gonna reign the same for five years, but just for the sake of this example, let's assume that it does. 00:14:45.405 --> 00:15:19.580 So in year one, they would donate $80,000 to the donor advised fund, and then they could take 16,000 out this year to give their $16,000 gift to their charity. This would reduce their taxable income by $80,000 because they get to deduct it all this year. And they would take the standard deduction for the next four years, making their taxable income 132,000 for the four remaining years. So they earned 160 this year, and they're gonna reduce their taxable income by the $80,000 deduction, meaning their taxable income this year is gonna be 80. And then the next four years it would be 132. 00:15:19.820 --> 00:16:06.165 So by doing the donor advised fund, their taxable income over the next five years is gonna be $608,000 Remember, everything's being assumed to remain the same. If they don't do the donor advised fund and they just take the standard deduction every single year and they give their $16,000 as they have been, their taxable income would be $660,000 which is $52,000 more than if they did the donor advised fund. So by doing the donor advised fund, they're going to reduce their taxes by $11,400 over the next five years. And that's based on a 22% tax rate on the $52,000 that they would be saving. So $11,400 is what they would be saving in taxes over the next five years in total, which is over $2,000 per year in tax savings. 00:16:06.565 --> 00:16:45.850 So now we can see that we're kind of diving into some territory of, hey, these tax savings might start making some sense. So that's a quick and kind of fairly basic example, but the benefits get amplified the higher the dollar amounts go. So if you're going to give $50,000 a year to charity or anything that you care about, well, using a donor advised fund and funding $250,000 for five years worth of giving right now, today, this year, can offset that against your income. And that's when things can really start snowballing and really be impactful for you, in terms of tax savings. So the higher dollar amounts are really where you're going to make the most, bang for your buck and using a donor advised fund. 00:16:46.010 --> 00:17:16.460 But these examples hopefully show you how this works and how you can use this to your advantage. Now, one other time that I mentioned earlier that you can use a donor advised fund and can leverage that to your advantage is whenever you're, let's say in your gap years and maybe you're doing Roth conversions. Well, you can use the gifts to the donor advised fund to offset the income created when you're doing a Roth conversion. I talked about that earlier, but let's walk through a quick example just to kind of show you how this might work. So let's just say that you have a $100,000 Roth conversion you're trying to do this year. 00:17:16.460 --> 00:18:04.215 Well, you can offset that 100,000 of income that you're gonna create by doing a $100,000 contribution to your donor advised fund. Now that contribution could come from cash, taxable accounts, appreciated stock or anywhere else like I mentioned before, but by doing this, you can convert $100,000 to the Roth essentially tax free, and you get to fulfill your charitable giving goals for years to come. So this is a win win. You get to move a full 100,000 to the Roth account from your tax deferred account, pay no tax, and by funding your donor advised fund, assuming that you are charitable, remember, I would only do this if you are charitable already or plan to be here in the future, But by doing this, you get to fund your charitable giving goals and you get to pay no tax on that Roth conversion, which is kind of next level. So these are kind of the planning strategies I like to do with my clients. 00:18:04.215 --> 00:18:48.990 And, you know, if you're wanting to learn more about how I do this with my clients and what that kind of looks like, there's a link down in the description below and you can schedule a free call with me. Happy to talk with you and share how I help plan for all these things and give them confidence in retirement. So that's a pretty good overview of donor advised funds. It's a powerful strategy, you know, if it fits your situation, if you've got certain assets that you can give, whether that's in a taxable account or you've got a bunch of cash on hand, and maybe you wanna pair that with a Roth conversion, or if you know you're gonna be charitable for the next five, ten, fifteen years, doing those donor advised funds and contributing it all in one year, that might can help you save a ton of taxes over the next few years. So just wanted to share these ideas with you today, but remember here are the main things you need to know. 00:18:48.990 --> 00:19:18.150 You can contribute as much as you want to a donor advised fund. The contributions are tax deductible, but they are irrevocable, meaning you can't take them back out once you add them to the fund. You will want to be strategic in how and when you donate to the donor advised fund. The money can be invested inside of that Donor Advised Fund and grow for years to come so you can build up a larger benefit for the church or charity that you wanna give to. And finally, remember, I encourage you only to use the Donor Advised Funds if you're already giving charitably or if you plan to in the future. 00:19:18.255 --> 00:19:41.020 Don't just do this simply for tax savings. So that's a quick roundup and some thoughts on donor advised funds. I hope it's helpful for you as you just learn more about this and maybe want to implement some of this in your plan. Again, complete the quick listener survey in the description down below for me. I'd love to hear your feedback and, also be sure to leave a review on Apple Podcasts and Spotify if you're finding the podcast helpful. 00:19:41.260 --> 00:20:02.720 Thanks so much and I wish you a Merry Christmas. I look forward to talking with you again right here next week. Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacob@retirementanswers.net. And I'd love to answer that question for you right here on the show. 00:20:02.880 --> 00:20:15.789 Also, I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.