Using a Donor Advised Fund (DAF) to offset a Roth IRA Conversion

It’s been a while since I’ve wrote out finances, so let’s dig in, and let me preface this by saying that I am not a financial professional; please consult a professional (as I did) before you embark on any significant tax-saving strategies.

Okay, with that out of the way, let’s summarize two things: one, I think charitable giving is important, as I’ve written about before in several different essays. If you have the ability to help others and you’re currently not doing so, or if you wonder if you could be doing more, please consider reading my blogs on this topic, and in particular read about Peter Singer and his philosophy about giving money wisely.

Two, I’d like to have as much retirement income in tax-free accounts as possible - in other words, Roth accounts. I’m happy to pay taxes and contribute to the United States every year, but I also want to do intelligent and legal things to mitigate the tax I pay. Rich people do it, so I figure my family should take advantage of the same strategies when possible.

Now, you’re legally allowed to transfer money from a pre-tax retirement account like a traditional IRA or a 401k into a Roth IRA, but it’s a taxable event, and paying a big extra chunk in taxes is prohibitive most of the time. So even though I want to have as much of our retirement savings in a ROTH IRA so that we can withdraw money tax-free in our retirement, I’m not willing to do so if it means paying taxes now.

With that in mind, I’d like to discuss a method of satisfying both desires - giving to charity and moving money into a Roth IRA - without increasing your taxes.

In 2022 I learned about Donor Advised Funds (DAFs), a device that allows you to move more than one year’s worth of charitable giving into a fund for future distribution. The idea is that if you are able to contribute several year’s worth of charitable giving into a DAF in one calendar year, then you can then itemize the deduction on your taxes. This became especially important a few years ago in states like Illinois with high state and property taxes, because after the SALT tax deduction was enacted, these deductions were capped at $10K. So in 2022, when the standard deduction was $25, 900, it required an addition $15,900 of charitable giving before you could benefit from itemizing your deductions. In 2024 the standard deduction is up to $29,200, so it takes nearly $20K of charitable giving to begin to itemize your deductions.

Now, I’m aware that we should give to give, not to reap financial benefits. I get it. But we can give a whole lot more if we do get a deduction, which is why charitable deductions are allowed in the first place - to spur charitable giving.

For argument’s sake, let’s say you have $100K in a brokerage account somewhere and you like to donate $20K a year to charities (and I recognize that these numbers might be pie-in-the-sky - I’m just trying to make it simple). Depending on your income (there are restrictions, so do your homework) you could take $100K from your traditional IRA or 401K and transfer it to a Roth IRA, and then offset the tax implications for this event by moving $100K from your brokerage account into a Donor Advised Fund. The two events should be close to a wash, and you’ll wind up paying around the same tax as you did last year. And now you have five-year’s worth of charitable giving ready to go!

Even better, you can move appreciated assets into the DAF tax free, thereby avoiding capital gains on that amount. And wait, there’s more! The assets you have in the DAF can grow over time, allowing you to give even more money to your favorite charities!

Pretty slick, eh? To me, it’s a no-brainer, and I’m surprised that this strategy isn’t discussed more on-the financial pages I read.

I studied this method for weeks, wondering if I was missing something, and finally bit the bullet and emailed a financial advisor who I hire from time to time for a flat fee (always a flat fee - never a percentage) and asked him about the above strategy. He wrote: “Love this strategy, we do it all the time. Yes, I approve everything you are planning as described in your email.” He then went on to explain a few specifics to be aware of that were helpful, so please do your homework and get the advice of a professional before you pull the trigger.

If you’re lucky enough to have some assets on-hand that you don’t need immediately and you believe in helping others, consider looking into this strategy. It’s a win win win win.

Give More, and Give More Wisely

Recently listening to George Michael's 1990 release, Listen Without Prejudice, Vol. 1 (a fantastic album – if you don't know it, give it a chance), I was struck by the lyrics of the opening track, “Praying for Time,” a tune that intrigued me upon its initial video release on MTV back in the day, but one that I'd never properly absorbed lyrically. It's about the haves and the have-nots, or as Michael offers, the “beggars and the choosers.”

He sings:

The rich declare themselves poor
and most of us are not sure
If we have too much
but we'll take our chances
’Cause God's stopped keeping score

And something a bit more direct in verse two:

These are the days of the empty hand
You hold on to what you can
And charity is a coat you wear twice a year

Strong stuff, and the call to action implicit in “Praying for Time” is something that I think needs to be wrestled with. Whether or not you believe in God, I think it's better to live as if what we do matters, and if believing – or merely considering – that there is an entity "keeping score" of our actions is what spurs you into doing more to help others, so be it. Unfortunately, for many of us – even those who do believe in God – charity is indeed nothing more than a few articles of clothing dropped off at Goodwill twice a year.

To which I say, do more. Give like it matters. Give like someone is tallying all of your actions, keeping score, whether or not you think it’s nonsense.

I find it fascinating and frustrating that many who consider themselves Christians don’t take Luke 18:25 to heart:

Indeed, it is easier for a camel to go through the eye of a needle than for someone who is rich to enter the kingdom of God.

I’ve heard preachers attempt to wriggle their way out of that verse, claiming it’s taken out of context, blah blah blah, but to me it sounds pretty fricking straight forward. Give. Don’t amass obscene amounts of wealth. If you do, you have a lot to answer for when you meet your maker.

Similarly, I find it no less fascinating and no less frustrating that many who consider themselves Jewish don’t take seriously the laws of tithing found in Leviticus 27:30, Numbers 18:25–28, Deuteronomy 14:22–24, and 2 Chronicles 31:5–6. 

Whether or not these Bible verses speak to you, you may find some assistance on how much to give and where to give on philosopher and philanthropist Peter Singer’s terrific website, The Life You Can Save. I’ve recently reevaluated the charitable giving for my household because of it.

Singer believes that not only do we not give enough, we don’t give wisely. We support charities that offer very little bang for the buck, eschewing the good we can do to the most destitute overseas in favor of helping far fewer here at home. I’ve chosen to take a middle-ground approach. I still have my favorite local organizations that I feel strongly about, but I am going to set aside a significant percentage to improving the lives of those who need it most (as well as to environmental causes). Singer’s website offers simple ways to give directly to the causes that you feel most strongly about: tackling climate change, saving lives, helping woman and girls, education…there’s certainly no shortage of worthy causes for you to focus on.

What I found particularly helpful is determining how much to give. If you take tithing to the letter of the law (and I’m not saying you shouldn’t), you give 10% of your income. Period. My family has been giving less than that, but now that we’ve paid our last tuition bill, I wanted to get some guidance on what makes sense for us going forward. Peter Singer’s website actually has a calculator that suggests a target amount for charitable giving, and if you want to know more, they include the formula used to determine the amount. Using this, my family will now boost our giving by about 50% next year. It may not be a perfect calculus, but it’s a nice guideline when asking the question, “How much should I give?”

Perhaps you won’t find the answer that works for you on the above website. But if charity for you has been “a coat you wear twice a year,” I urge you to reconsider your role on Planet Earth and what you can do to alleviate as much suffering as possible. You may have the power to do more good than you think.