Could Donor-Advised Funds Soon Be as Popular as 401(k)s?

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As the economy continues to ebb and flow in a post-COVID world, consumers are looking for straightforward financial wins, but often they aren’t sure what moves to make or what tools to use. Most Americans are aware of 401(k)s, even though 40% of Americans do not fully understand the fees and the rules surrounding them.

Which Type of Donor-Advised Fund Is Right for You?

Like 401(k)s, there is another type of account that can bring financial benefits to a large number of Americans and is rapidly growing in popularity. It’s called a donor-advised fund (DAF), which is a tax-deductible financial account for charitable giving.

What a Donor-Advised Fund Can Do for You

A reader might be asking, “How could that be beneficial to me?” Just like a 401(k) makes retirement simpler, a DAF simplifies giving while providing powerful tax advantages and investing options. Here are three consumer benefits donor-advised funds offer:

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First, donor-advised funds give consumers one place for all their giving (on one consolidated tax receipt), like a checking account but for philanthropy.
Second, consumers can easily donate stock, cryptocurrency or other assets into their account and avoid capital gains tax while distributing proceeds to any charity.
Third, because dollars are eligible for tax advantages the moment they hit the account rather than when they are sent to charities, donors can take the time they need to discover high-impact charitable opportunities without worrying about tax implications. Most DAFs allow the money to be invested while it is in the account, and it can grow tax free.

All of this allows for greater opportunity to be smart about your giving.

More than the financial smarts, DAFs help you give more purposefully, which can help you live a richer life. The act of giving is associated with many aspects of psychological and relational well-being, and this type of account enables greater flexibility for donors to participate in giving, even if a donor isn’t sure yet what cause to support.

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Corporate donors are also catching on. DAFs are increasingly being used to support workplace giving programs as an alternative to federated funds (e.g. the United Way) and corporate foundations.

How DAFs Have Improved Recently

In recent years, donor-advised funds have become more straightforward to create and use. Many sponsors now offer low-fee exchange-traded funds (ETFs) as investing options, and because of increases in technology, administrative fees and minimums to open have come down. Additionally, they don’t require sensitive information like Social Security numbers to set up, and each sponsor ensures each charity is in good standing with the IRS. Startups in the space, such as Charityvest, are accelerating this movement to make DAFs more delightful and to lower fees.

It’s no surprise DAFs are growing quickly. In one year alone, from 2019 to 2020, the number of DAF accounts jumped 16.3% to more than 1 million.

At Charityvest, we’ve witnessed success firsthand through our growth over the past three years. We started Charityvest because we wanted to make giving more purposeful, allowing for better planning in how and where people give. Users can make tax-deductible contributions of cash, stock, complex assets or cryptocurrency into their fund, and then direct those funds to over 1.4 million nonprofits in the U.S., while keeping their giving on a single consolidated tax receipt. With the introduction of low-fee ETF portfolios earlier this year, users can invest their fund balance to grow their giving, with all-in fees 25%-50% lower than the leading providers in the DAF space. Simply, the idea was to make giving easier, and more purposeful, and we believe DAFs do that.

The industry is experiencing remarkable growth as individuals and institutions increasingly see DAFs as their preferred way to give and facilitate giving. The opportunity to become more purposeful and streamline giving is a powerful combination. Technology and innovation are pushing these accounts to more people, making tax-smart, easy, thoughtful giving available to everyone who wants to donate to charities, in the same way the 401(k) did for retirement.

Charitable Trade-offs Between Donor-Advised Funds and Private Foundations

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Stephen is President of DAFs at Foundation Source, a philanthropy technology company serving donors, institutions, and workplaces with turnkey philanthropic solutions. He is also the founder and a board director of Charityvest, a donor-advised fund sponsor, and Chairman of the Board of Teen Advisors, a nonprofit helping teenagers confront the young adult mental health crisis through peer-to-peer influence. Prior to building philanthropy technology, he worked as a consultant to philanthropists, corporations and private equity, most recently with Bain & Company.