Choosing Between a Donor Advised Fund and a Qualified Charitable Contribution

If you’re interested in giving more intentionally while also managing taxes, there are a few approaches to consider. Two of the more popular ones are using donor-advised funds (DAFs) and qualified charitable distributions (QCDs). Each has distinct features and benefits. If you are eligible (only individuals age 70.5 or older can use an IRA QCD), the choice between a DAF and QCD depends on your goals and your personal income tax circumstances. Here are some things to consider when deciding which approach might be best for you. 

Impact 

You can invest contributions to a DAF, which may allow them to grow tax-free within the charitable account and support larger grants over time, although assets contributed to a DAF are irrevocably donated for charitable purposes. You must send the QCD directly to a charity when you withdraw it. 

Timing 

If you have a charitable budget but need time to decide which charities to support or how much to give, you can make a lump-sum contribution to a DAF. Then, you can distribute those funds to multiple charities over time, even in the following year. 

A QCD needs to be specific and pre-determined. 

Costs 

A DAF does come with administrative fees. Depending on how you plan to use it, the added convenience may make those costs worthwhile. 

Processing a QCD is generally low-cost, although fees or administrative requirements may vary by custodian. 

Privacy 

You choose whether to make DAF grants publicly or keep them anonymous. 

A QCD check does not keep your identity private from the charity. 

Recordkeeping 

A DAF handles the recordkeeping for you, which can make giving to multiple charities simpler, and most grants can be made online. That said, it may set a minimum grant amount, often around $50. 

You can use a QCD to support multiple charities in amounts large or small, but you’ll need to track each check and handle the added reporting yourself. 

Family 

You can name family members as co-grantors on a DAF, and your heirs can manage any remaining balance to continue your charitable legacy. 

QCDs don’t provide many opportunities for family involvement. An IRA beneficiary could make QCDs from an inherited IRA, but only after reaching age 70.5. 

Tax Efficiency 

Both strategies are subject to specific IRS rules, eligibility requirements, and limitations that can affect their relative tax impact. 

You can make a gift to a DAF and receive a tax deduction, even if you don’t distribute grants right away. A QCD generally allows eligible IRA distributions to be excluded from taxable income.  

Evaluating which option offers the greater tax benefit can get complex, often requiring projections based on your specific situation. Here are a few general considerations to help guide your decision. 

• If you prefer to give cash and don’t have long-term appreciated investments to donate, a QCD may be more tax efficient in certain situations than a cash gift to a DAF. 

• If you want to donate an appreciated security and reduce concentration in your portfolio, a DAF can help you accomplish both. 

• If you have a highly appreciated security but could realize long-term capital gains at the 0% tax rate, you may not leverage the full tax advantage of a DAF compared to the pre-tax QCD gift. 

• If you are not able to itemize deductions, or your itemized deductions are not much more than the standard deduction, a QCD may provide a more immediate tax benefit. 

Other factors may include how your intended gift compares to your required IRA distribution, whether you have any basis from non-deductible contributions, your income level and potential Medicare surcharges, and your age and estate planning goals. 

The strategies don’t need to be mutually exclusive or all or none. You can elect to use both a DAF and a QCD in the same tax year, or alternate year-to-year as circumstances change. 

One Final Consideration… 

One potential drawback is that QCDs can create tax reporting issues if you’re not careful. The Form 1099R used to report IRA distributions doesn’t include a specific code for QCDs, so if you or your tax preparer relies on it without making a manual adjustment, you could mistakenly report the distribution as fully taxable even when it was handled correctly.  

Given that QCDs have been around since 2006 and became permanent in 2015, this gap in IRS reporting is noticeable. QCDs can still be a useful charitable strategy in certain situations, especially if you don’t need to use your IRA RMD or wouldn’t see as much benefit from a DAF. 

No matter how you choose to give, be clear and accurate when communicating with your tax advisor so your results align with your expectations. 

This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment or tax advice from Savant. Please consult your investment or tax professional regarding your unique situation.