Offsetting a large Roth conversion with a Donor Advised Fund (DAF) charitable donation
I thought I should share my experience using Daffy for my DAF charitable donations. I am in no way affiliated with Daffy, other than as a user for the past 3 years.
Quick review of DAFs for anyone new to the concept:
•If you regularly donate to charity but do not have enough deductions to itemize, you are not receiving much of a tax benefit. Recent legislation does give a new $1,000 ($2k married) deduction for cash donations even if you take standard deduction. However, it is capped and does not allow for the donation of appreciated assets (investments).
•By bunching a number of years of charitable donations into one year with a DAF, the tax savings can be significant …particularly in a year with a high income event like a Roth conversion.
•Donating highly appreciated stock has a double tax benefit of the deduction for the charitable donation + avoiding capital gains on the donated stock. Many charities are not setup to accept stock directly, so a DAF can help facilitate this.
•The deduction for non-cash donations to a DAF is capped at 30% of MAGI (60% for cash donations).
•Once you put funds into a DAF you make “distribution recommendations” to the administrator for qualified charities. But you no longer own the funds - there is no way to claw back the donation to your personal assets. Technically you “lose control” but in practice the administrators seem to follow your recommended distributions as long as the charitable organization is legitimate. (If they didn’t, there would be outrage in the DAF community as illustrated by a couple of edge case incidents with other DAF providers.)
Criticisms of DAFs:
•High administrative fees. Often 0.5% to 1% of the fund annually. However, Daffy largely solves this with a VERY modest fee schedule.
•Many in the charitable community criticize the fact that a large pool of funds earmarked for charity is sitting on the sidelines in DAFs. While I would encourage anyone to get contributions distributed to their preferred charities, I do not necessarily see large DAF balances as an issue. I am personally prefunding my planned charitable giving for a number of years. (If the funds weren’t in my DAF, they would be in my brokerage account instead.) If anything, the additional tax benefits of a DAF make me more charitably inclined.
My experience:
•Three years ago I decided to test Daffy with a $30k contribution.
•My preferred charity was not on “the list” but since they are a 501(c)(3) charity, Daffy quickly added them in just a few days.
•My “recommended distributions” from the fund have been very quickly processed and sent out to charities. The entire process is often completed in about a week.
•Since I am doing a large Roth conversion this year, (pushing my total income near $300,000) I am combining that with a $90,000 DAF contribution of highly appreciated stock. That removes $90k of income from the 32% tax bracket, plus eliminates $70k in capital gains on the appreciated stock.
•Fees. Daffy fees are based on average annual contributions. Up to $25k in average annual contributions is a $3/month fee. Since this recent donation takes me above that, the fee is now $5/month. If my math is right, I’m paying a 0.07% annual fee - very, very modest compared to the other administrators!
Overall I’ve been quite pleased. A great tax tool for anyone that is charitably inclined. In my experience Daffy has been a low fee, low headache DAF provider/administrator.
Feel free to chime in with any good/bad experiences you’ve had with them or other DAFs.