Are Index Funds Right For Me?

As a starting point, an index fund is simply a basket of stocks or bonds that aims to replicate a market index (e.g. S&P 500) and match the performance. Overall, we believe index funds can be useful tools in implementing an investment strategy for many people. The benefits of index funds include:

  • Very low explicit costs (i.e. expense ratios of index ETFs & mutual funds)
  • Low turnover of the underlying holdings, which can create greater tax efficiency relative to higher turnover strategies
  • Broad diversification
  • Limited risk of investment underperformance

These are all good things!There are many core principles of index fund investing that have a high correlation to strong investment outcomes. So why would anyone differ from this strategy?

I believe there are two good reasons to differ from owning purely index funds – 1) Risk Management and 2) Expected Returns.

When constructing an investment portfolio, I believe it’s important to take into account one’s human capital alongside of their financial capital. For many individuals who I serve, equity in their company makes up a meaningful portion of their total financial portfolio or annual compensation package. This concentrated stock position creates an additional risk factor within the investment portfolio and broader financial plan. To help manage this risk, I believe it’s prudent to complement this concentrated position with an investment portfolio that emphasizes stocks that possess different characteristics than your company stock. For individuals with stock in a pre-IPO company, this could mean having more exposure to highly profitable and lower valuation companies, which tend to be the opposite characteristics of venture-backed companies.

In addition to managing the risks associated with concentrated stock exposure, I believe pursuing higher expected returns is another valid reason to deviate from an index-based investment strategy. That said, it’s important to unpack how I pursue higher expected returns. Unlike many portfolio managers who seek outperformance through selective stock picking or speculative positioning based on economic forecasts, I focus on pursuing an evidence-based approach that is backed by data on what drives returns in capital markets. This approach is designed to outperform index fund investing over the long run, at a lower cost than traditional, actively managed funds.

What does this mean for client portfolios?

  • They are low cost. The investment solutions I use have expense ratios in the bottom quartile of their asset class. This means you keep more of the returns.
  • They are well-diversified. We live in a global economy and these strategies target exposure to thousands of companies across the globe, reducing the impact of any one company on investment outcomes.
  • They’re designed to outperform the market over the long run. The strategies I use are backed by strong theoretical and empirical evidence, putting the odds of success in your favor.
  • They’re transparent. Knowing what you own and what you’re paying for these investments are core tenets in a long-term investment strategy
  • They are intentional. There is a return, risk, or cost based rationale for every position and action in your portfolio.

I don’t believe that I (or anyone else for that matter) can reliably predict market movements, which is why I focus on controlling factors that are in our control, such as tax efficiency, asset location, global diversification, and liquidity management.

The financial plan I build is the lens through which I develop the asset allocation and investment strategy I ultimately pursue within your portfolio. I aim to position your portfolio to take the least amount of risk that will enable you and your family to achieve your financial goals and sustain the lifestyle you desire throughout your life.

Lastly, the investment portfolio that I help to build and manage on your behalf is not the “swing for the fences” portfolio. Rather, it is structured in a way to produce reliable investment returns that correlate with the assumptions I’ve built within your financial plan. Your human capital is a unique asset, and if you desire to take a big swing by launching your own business, joining an early-stage company, or investing in / advising a startup, my objective is to manage the rest of your financial portfolio in a manner that promotes these pursuits.

Does a 529 Plan Make Sense for Us?

If you have been thinking about starting an education savings account for your child, then the start of a new year is a great time to incorporate this into your annual savings plan. Additionally, your children may have received holiday gift money from grandparents or family members, which could be a great option to seed your child’s education savings account.

As it relates to saving for your child’s education, I frequently receive questions such as:

  • “Is a 529 plan a good idea for saving for our child’s education?”
  • “What happens if our child gets a scholarship or even decides not to go to college?”
  • “There’s so much unknown on what the future of college education will look like / cost – how much does it make sense for us to save?”

This post is going to address these questions and provide a framework for how I approach advising clients to save for children’s future education.

Types of Accounts
A 529 plan is a tax-advantaged savings account that allows for your contributions to grow tax-deferred, and distributions for qualified education expenses are tax-free. Qualified education expenses consist of tuition, books & supplies, and a laptop or other equipment for your student. You can also use 529 plans for trade schools and apprenticeship programs, if your child decides not to enroll in a traditional 4-year university program. Many states offer a state-sponsored 529 plan and some even provide a state tax incentive for funding these plans that you can claim on your annual tax return.

If you would prefer to set aside funds for your child that are not limited to education expenses, an alternative option is to establish a custodial account, also known as a Uniform Gift to Minors Account (UGMA). These accounts would be opened in an adult’s name “for the benefit” of your child. Once the child is no longer a minor (typically age 18), this account converts from the parent’s name to the child’s individual account. Your child would then have full discretion for how these funds are invested or spent once the account becomes available to them.

Investment Options
Similar to a 401k plan, a 529 plan offers a limited number of investment fund options that you can choose from. Most plans offer index fund options, as well as Age-Based Strategies. The Age-Based strategies are primarily invested in stocks while your child is young and then gradually shift to safer investments (bond funds & cash), as your child gets older & nears the age of needing these funds to cover education expenses.

For parents who opt for establishing a custodial account, these accounts can be established through a financial custodian (e.g. Charles Schwab, Vanguard, Fidelity). You would have access to more robust investment offerings and could allocate these funds however you desire. Unlike 529 accounts, custodial accounts do not offer tax-deferred investment growth. These are taxable accounts and are subject to “Kiddie Tax” rules. If the account generates more than $2,600 of investment income, the amount above this threshold is taxed at the parents tax rate. Tax efficient investments that don’t produce a lot of dividends or interest income are going to be the most attractive investments to hold within a custodial account.

Account Flexibility
529 plans can be used for private K-12 tuition, up to $10,000 per year, per child. If your state provides a benefit for 529 contributions, one option to consider is pre-funding the 529 plan with the annual tuition amount and then distribute money from the 529 plan to your child’s school. However, for couples who have the ability to cover private K-12 tuition through cash-flow, you can let the 529 funds continue to grow for postsecondary education expenses.

529 plans enable you to change the account beneficiary at any time, so if one child receives a scholarship or has a surplus in their account, you could reallocate these funds to another child or even pass this account down to the next generation for a grandchild to benefit. Additionally, 529 plans can be rolled over to a Roth IRA (tax-free retirement account) for the original beneficiary, up to a lifetime maximum of $35,000. This could be a great head start for your child & help teach them the power of investing for their financial future!

If money is distributed from a 529 plan for a non-qualified expense, then any growth on the investments would be subject to income tax and a 10% penalty. However, your original contribution can be withdrawn tax & penalty-free. Given the flexibility of reassigning the account to another beneficiary or rolling over funds into a Roth IRA for your child, I tend to view a non-qualified distribution as a “last resort” option.

Custodial accounts possess ultimate flexibility for the funds within the account, so for parents who desire to allocate a portion of discretionary funds to help give their child a “head start” as an adult, this can be a great avenue for doing so. Since the account will convert into your child’s name upon reaching age 18, it’s important to assess if you’re comfortable with your child having full discretion over how this money is used.

For parents who are hesitant to establish an account dedicated for educational purposes and also don’t like the idea of their child having full reigns over an account at age 18, an alternative option would be to invest for your child in your brokerage account. You have the ability to use these funds for their education or even provide gifts to your children in increments that you feel comfortable with as you observe how they handle money upon becoming a young adult.

Deciding What Makes Sense for You
Given the tax-deferred growth of money invested within a 529 plan, these accounts are most powerful when your child is young and can reap the benefits of 10-15+ years of investment growth. With this in mind, it can make sense to “front-load” 529 plans if you receive a cash bonus or have a liquidity event for your equity, if you have children under the age of 5. Additionally, if your state offers a tax benefit for contributing to a 529 plan, funding up to the annual benefit amount can lower your state taxes while fulfilling your desire to save for your child’s future education. For parents who value financially supporting their children’s education, 529 accounts are great vehicles to incorporate within your annual savings plan.
For those who desire additional flexibility and are comfortable with their children having the ability to make financial decisions upon turning age 18, a custodial account may be a better route to pursue. Both of these accounts can have a place within your financial plan, so I encourage you to reflect on what is the primary purpose for your money and use this as your guiding light for selecting which accounts to fund and how much to allocate to these accounts.

What is a Backdoor Roth IRA? Does it make sense for me?

“My income is too high to contribute to a Roth IRA so I don’t have one”.

This is a common response I receive when I ask if someone is familiar with the benefits of contributing to a Roth IRA.

While there are income limitations to contribute directly to a Roth IRA, the backdoor Roth IRA is an attractive retirement savings strategy no matter how much income you make.

For high-income earners, there are a few additional steps to take to properly fund a Roth IRA.

Income Limits

The IRS has rules for who is eligible to contribute directly to a Roth IRA based on their income. For 2025, the income limitations start at $236,000 for couples filing a joint tax return ($150,000 for individuals filing as single on their tax return). If your income is above these limits, you’ll need to pursue the backdoor Roth IRA strategy.

Contribution Limits

In 2025, you are able to contribute up to $7,000. For individuals over the age of 50 by December 31, you can contribute an extra $1,000) to a Roth IRA or backdoor Roth IRA. It’s important to note that the IRS requires you to have earned income up to the amount you contribute to a Roth IRA. There is one exception to this rule – you can make a spousal IRA contribution on behalf of a non-working spouse.

Implementing a Backdoor Roth IRA

If your income exceeds the limits to contribute directly to a Roth IRA, you’ll need to pursue a few additional steps.

  • Step 1: Establish both a Traditional and Roth IRA – The money needs to first deposited into the Traditional IRA and then the funds are subsequently converted to your Roth IRA.
  • Step 2 – Contribute Funds to a Traditional IRA – You should make a “non-deductible” contribution, up to the annual limit, from your bank or brokerage account into a Traditional IRA. It’s important to note that this deposit can only be made in the form of cash.
  • Step 3: Transfer Funds from your Traditional IRA to your Roth IRA – The best practice is to let the funds sit within your Traditional IRA for a few days prior to converting the funds to your Roth IRA. This is the “backdoor” mechanism of funding your Roth IRA.
  • Step 4: Invest the Cash within your Roth IRA – Waiting to invest the cash in the IRA avoids any earnings being taxed on the Roth conversion.
  • Step 5: File a Form 8606 on your tax return – When it comes time to file your tax return, it’s important to report the non-deductible contribution on your tax return. This indicates to the IRS you are not claiming a tax deduction for the IRA contribution and it establishes the “basis” for your account.

Deadline to Fund a Backdoor Roth IRA

The deadline to contribute to a backdoor Roth IRA is the tax filing deadline, April 15th, of the following year to complete your contribution up to the annual limit.

Watch out for the Pro-Rata Rule

This is a rule to be aware of so you don’t incur adverse tax consequences upon executing a backdoor Roth IRA.

You do not want to have money in pre-tax IRAs when pursuing the backdoor Roth IRA. This includes a rollover IRA from a previous employer’s 401k plan.

Why does this matter?

The IRS does not allow you to only convert the non-deductible IRA dollars. They take into account your total IRA balance and prorate the conversion amount based on your IRA balance across all IRAs. This includes Traditional IRAs, IRA Rollovers, SEP IRAs, and SIMPLE IRAs.

For example, let’s say you have an IRA rollover with a balance of $63,000. If you attempted to do the backdoor roth with the $7,000 contribution this year, the pro rata rule would kick in.

$7,000 / $70,000 (Non-Deductible / Total IRA balance) = 10% of your total IRA balance is after-tax, therefore, $700 would be considered “basis” and the other $6,300 would be taxable as ordinary income in the year of the conversion. Not ideal!

You may notice that 401k’s are not included in this list. This is because a 401k is an employer-sponsored retirement plan, not an Individual Retirement Account (IRA).

So, if you have access to a 401k plan through your current employer and you also have IRAs with pre-tax money, you could transfer these pre-tax IRA accounts into your 401k plan. This would clear out your IRA balance, which would enable you to pursue the backdoor Roth strategy without being subject to the pro-rata rule.

The pro-rata rule is based on your total IRA balance on December 31st of the year in which you do a Roth conversion. So if you intend to transfer your IRA into your 401k plan, you want to make sure this is completed before the end of the year.

Overall, I believe a Backdoor Roth IRA can be a great method for high-income earners to build up a tax-free retirement account. However, it’s important to understand the rules of how to execute this strategy correctly so you don’t encounter any unexpected tax consequences. If you’d like to see how a backdoor Roth IRA strategy could benefit you this year, I’d love to chat with you!

New Year’s Resolutions? What Traditional Financial Advice to Ignore in 2025

I hope you enjoyed a wonderful holiday and are feeling refreshed (see what I did there!) For me, I took a few extra days to recharge and I couldn’t be more excited for what’s in store for 2025.

With the new year underway, maybe you have set out to make changes with your personal finances. The start of a new year is a great time to reflect on a few questions such as:

  • Where did I enjoy spending money last year?
  • What financial decisions am I most proud of over the past year?
  • Do I feel confident that I’m doing the right things to set me up for a strong financial future?
  • How could I become more proactive with my finances this year?
  • When was the last time me and my partner had a conversation about our finances

These are questions that I ask my clients and their answers help to inform where we focus our attention this year and influence how I provide recommendations. There’s no shortage of articles and TikTok influencers giving advice and tips for setting financial goals in the new year, so it’s important to know what advice is legit and what advice should you tune out.

Rule number 1 about personal finance… It’s personal. So what applies to one person may not be helpful for another. To help evaluate advice you read or watch, I thought I’d cover a few common pieces of financial advice, and why it may not be the right advice for you.

📋 Track all your expenses on a budget!

For some, creating a budget can be a great way to prioritize where you’re spending your money. If you’re looking for more insights on your spending, tools like Monarch Money is a great way to visualize where your money is going. For me, personally, and for many of the individuals I advise, no two months look the same from a spending perspective.

Therefore, I’d prefer to have more discretion over where I spend my money in a given month and not feel constrained to spend under a predetermined amount.

Consider this instead: Reverse budgeting (save first, spend whatever’s left)

While I’m not personally a fan of strict budget tracking, I am a big fan of simplifying my financial life. I’ve found that one of the best ways to do so is through automating my savings and investment contributions where I can.

By establishing automatic contributions into my 401k and Health Savings Account through my payroll, as well as direct deposits into my brokerage account and online savings account, it provides confidence that I am responsibly setting aside funds for the future and gives me the freedom to spend excess funds in my checking account guilt-free.

💸 Maximize your savings!

As a financial advisor, I’m always an advocate for helping individuals save and invest responsibly for their future. That being said, money is a means to an end. And I want to live a life that feels good now AND one that feels good later.

Generally speaking, increasing your savings and investment contributions is going to provide more optionality in the future (and financial flexibility is a wonderful privilege). Still, increasing your savings rate may not be the right move for everyone.

For example, it could be favorable to pay down / off your student loans, rather than increasing your monthly savings. If you have been a diligent investor throughout your life, maybe now is the time to pair back your savings rate so that you can take that long-awaited trip abroad this year.

My wife and I trimmed our savings rate this past year so that we could spend a week in Maui & plan a bucket-list trip to South Africa for this year. Would our account balances be a few thousand dollars more today had we not taken a trip to Maui? Of course. But that trip was one of the highlights from 2024 and I wouldn’t trade those experiences with my wife for an increased balance on our account statements.

How should you determine a prudent savings target? There’s no magic number or percentage that is right. Rather, I’d suggest reflecting on what is most important to you. What do you hope to accomplish over the next year? If you could craft your ideal life three years from now, what would look different from today? By gaining clarity to these questions, you can identify what you prioritize and make decisions about how much you save and where you spend your money that align with these values.

🧓 Maximize contributions to your 401k!

While a 401k plan has a lot of perks — such as the ability to establish a fixed percentage of your income to be automatically invested each pay period and access to a lineup of low-cost, diversified investment funds — maximizing your 401k contributions isn’t always the optimal decision.

Why? A 401k is a dedicated retirement savings vehicle, meaning these funds are not meant to be accessed prior to your retirement (distributions prior to age 59 ½ are subject to a 10% penalty). As an early/mid-career professional, there are a lot of competing financial priorities and a finite amount of capital to cover them.

So while I would absolutely recommend contributing enough to receive the full employer match, beyond that amount is when it becomes a case-by-case decision based on what is most important to you.

For my situation, my wife and I are hoping to renovate our two upstairs bathrooms and do a landscaping project in our front yard this year, so I have chosen not to maximize my 401k, and instead use these funds to put toward our “home projects” savings account.

If you don’t have a near-term cash need, investing excess cash could still be your best option, but doing so in a taxable investment account vs. a 401k would provide you with greater flexibility. Especially if you may need to access them before retirement.

For those of you with vested stock options, it could be wise to allocate funds toward exercising your stock options, rather than maximizing your 401k for the year. You certainly need to evaluate the risks associated with investing in your company stock, however, this decision could position you to retain far greater upside upon an eventual exit event for your company.

📈 Don’t exercise stock options until it’s clear that the company is going to exit!

Investing in a single company, especially a private company that has yet to create a sustainable operating model, certainly comes with increased investment risk.

This is why many financial professionals discourage startup employees from exercising their stock options until an exit event is certain. However, this inaction can be a costly decision.

The decision to exercise stock options should take into consideration both company factors (revenue growth, 409A revaluations, upcoming funding events, etc.), and personal considerations (current liquidity, upcoming cash needs, risk capacity, & career plans).

Early in a company’s lifecycle, the strike price is often very low (likely less than $1/share) and the Fair Market Value (or 409A) may also be low, at least relative to your strike price.

This could translate into your total exercise costs being only a few hundred, maybe a thousand dollars. Now, it’s important to note that you should still have confidence in your company prior to making this decision, as I would not recommend anyone to aimlessly spend even a few hundred dollars on an investment. But I do encourage startup employees to view exercising stock options as a non-binary decision, meaning you don’t have to exercise all or none.

While no one aims to lose money when making an investment, the risk/return tradeoff of exercising stock options with a low strike price without any significant tax consequence, could warrant the opportunity costs of purchasing shares in your company before an exit event is clearly defined.

If one of your new year’s resolutions is to be more proactive with your finances this year, I’d love to chat with you to learn more about your situation and what you desire to accomplish over the next year.

Three Bucket System for Investing

Many people are familiar with the concept of owning a diversified investment portfolio, however, I believe tax diversification across your investment accounts is equally as important. An effective tax strategy focuses on helping you pay the least amount of tax over the course of your lifetime.

It’s uncertain what tax rates and policy will be in the future, so one method to mitigate the risks of paying higher taxes in the future is to own assets in a variety of account types. From a tax perspective, there are three main types of accounts that I’ve outlined below. Creating a thoughtful savings plan to build up each of these account types over your lifetime can provide additional financial flexibility as your life circumstances change or new tax legislation is passed.

When building a financial plan, I focus on a three-bucket approach for my client’s annual savings & investment strategy. These “buckets” consist of the following account types:

  • Tax-Deferred
  • Tax-Free
  • Taxable

To better understand what types of accounts are included within each bucket, when it would be beneficial to consider funding this type of account, and how one should invest money within each type of account, I’ve put together an outline below.

Tax-Deferred Account Types: Traditional IRA, Traditional 401k, Traditional 403b

What is it: A tax-deferred account is an account that allows you to defer income from being taxed in the current year. This is attractive for individuals who are currently in a high tax bracket and likely will continue to be going forward. This account allows you to receive a tax deduction in the year funds are contributed to this account. The money can then be invested and grow inside of this account tax-free. However, when you withdraw the money from these types of accounts, the tax you “deferred” will then be due.

Who benefits from these accounts: Individuals who are currently in a high tax bracket (think 32% or higher) and anticipate they will be in a lower tax bracket when they are no longer working full-time or individuals who live in a high tax state and have plans to relocate to a lower tax state.

How should I invest money within this account: Since the only time you pay tax on any of the money within a tax-deferred account is when you take it out of the account, this makes it attractive to own investments that are not tax efficient. For example, Real Estate Investment Trusts, or REITs, are publicly traded investment funds that primarily own commercial real estate. REITs can provide diversification benefits to stocks and bonds, however, the rents collected from the real estate properties are passed through the REIT to investors. While this makes for a nice passive income stream, this income is considered “non-qualified” in the eyes of the IRS, which means it is taxable at the same rate as your salary. In contrast, “qualified” dividends are taxed at a lower, long-term capital gains rate.

Tax-Free Account Types: Roth IRA, Roth 401k, Roth 403b

What is it: You pay taxes upfront, before the money is deposited into your Roth account. Once the money is in the account, you can invest these funds and benefit from tax-free growth. When it’s time to withdraw money from this account, you don’t pay any tax on the distributions.

Who benefits from these accounts: Individuals who are early in their career or are in a lower tax bracket (think 24% or below) will find Roth accounts most attractive. The younger you are, the more time you will have to benefit from your account growing tax-free. Additionally, as you advance in your career, it’s likely that your income will also increase, which leads to higher taxes. As your income & tax bracket increases, then you could look to switch your contributions from Roth to Traditional (Pre-Tax) accounts.

How should I invest money within this account: Since the money is growing tax-free, typically you will want your Roth accounts to be invested for the highest growth potential. Stocks are the growth engine in your investment strategy, while the primary purpose of owning bonds is to provide stability for your investments when stocks decline in value. The combination of tax-free growth and a multiple decade time horizon for this designated retirement account, lead to a diversified portfolio of stock ETFs or mutual funds as the primary investment strategy for Roth accounts. One final tidbit about Roth IRAs – unlike Traditional IRAs that are subject to Required Minimum Distributions upon turning age 73, Roth IRAs do not have mandatory distributions. So if you don’t need additional cash in a given year, you can continue letting your investments grow tax-free within your Roth IRA.

Taxable Account Types: Brokerage Account, Savings Account, Certificates of Deposit (CDs)

What is it: These accounts are funded with income that has already had taxes withheld or cash from your checking account. With these after-tax dollars, you can choose if you want to invest some of your excess cash or keep this money accessible for upcoming expenses. A brokerage account can be established at a financial custodian (Vanguard, Fidelity, Charles Schwab, etc.) and can be held in your individual name or jointly with your spouse. These accounts can be invested in publicly-traded securities (stocks, bonds, ETFs, money market funds) based on your time horizon for needing these funds and your comfort with taking investment risks. Savings Accounts and CDs are held at banks and can provide interest income for any cash you anticipate needing over the next 1-2 years and want to keep safe.

Who benefits from these accounts: I believe all individuals could benefit from building up a taxable investment account. These benefits include: flexibility, tax diversification, no contribution limits, and no early withdrawal penalties. Anyone can establish a brokerage account and begin funding it with as much or as little as they choose. I believe setting up automatic deposits on a monthly basis can be a great habit to start building up a non-retirement account. If you need to access these funds for buying a new car, putting a down-payment on a house, or paying the kid’s tuition, you can sell your investments and redeem cash within a few days to cover these expenses. Unlike a retirement account that imposes a 10% penalty if you withdraw money before age 59.5, there are no early-withdrawal penalties for these accounts. Lastly, when you invest money in a brokerage account, you only pay tax on the growth of your investments. The growth above your initial investment is treated as a “capital gain” and for investments held over one year, they are subject to a lower tax rate than what you pay taxes on your earned income.

How should I invest money within this account: Tax efficiency is one of the most important aspects of crafting your investment strategy for a taxable brokerage account. As I mentioned above, you want to locate investments that are not tax efficient (real estate, bond funds, & mutual funds) inside of your retirement accounts since these accounts are not subject to taxes on an annual basis. Within a brokerage account, you want to prioritize investments that are targeting to return money to investors through capital appreciation vs. capital distribution. Owning individual stocks or stock-based exchange traded funds (ETFs) are often tax-efficient investments to own within a brokerage account since most produce no or very little investment income. However, not all stocks and ETFs are created equal. Stocks that pay dividends, high-turnover ETFs, or funds that produce large amounts of capital gains distributions are not ideal investments to own within a brokerage account because you are subject to taxes on this investment income every year. Depending on your risk capacity and time horizon for needing to access money, bond ETFs can still have their place in your brokerage account. For individuals in a high tax bracket, tax-exempt bonds can be a good solution to balance both stability and tax efficiency within your portfolio.

As you can see, each of these account types have their role within your overall financial plan. Your stage of life, current tax bracket, and timeline for needing access to these funds, influence which account types make the most sense for you to prioritize in a given year. As these factors change year-to-year, we adapt your annual savings plan to prioritize which accounts suit your current situation. By having investments spread across all three of these account types, you create additional flexibility for your financial situation going forward. Financial flexibility is what I aim to maximize for the individuals and families I serve.

Super Charge the Tax Savings with your Charitable Donations

I’ve had the privilege of working with individuals and couples who are incredibly generous in supporting organizations and causes they care about. However, many of them were lacking a cohesive plan to align their donations with a thoughtful tax strategy. One powerful tool for charitably-inclined families to be aware of is a Donor Advised Fund.

A Donor Advised Fund (DAF) is simply a tax-advantaged financial account dedicated to charity. A few reasons why I’m a fan of these accounts are:

  • They are easy to set-up and very low-cost
  • You can donate cash, stocks, ETFs, or crypto to fund your DAF
  • You can disburse funds to charities over a multi-year period
  • You can lower your tax liability with a deduction in the year you fund your DAF
  • No hassle with tracking receipts from your donations come tax season

Beyond these benefits, with some thoughtful planning you can leverage a DAF to create significant tax savings. First off, it’s important to understand how charitable donations actually produce a tax benefit to you. Charitable donations are only beneficial to individuals or couples who “itemize” their deductions. This means the sum of your eligible deductions > than the Standard Deduction. Eligible deductions are reported on Schedule A of your tax return and include the following:

  1. Medical expenses in excess of 7.5% of your Adjusted Gross Income (AGI)
  2. State, Local, & Property Taxes – up to a maximum of $10k
  3. Mortgage Interest on your Primary Residence
  4. Charitable Donations

In 2024, the Standard Deduction is $14,600 (Single Filers) and $29,200 (Joint Filers). So if your eligible itemized deductions are less than the Standard Deduction, you would simply claim the Standard Deduction.

Now the magic of a DAF is that you are in control of funding this account in a year that will benefit you the most from a tax perspective.

Donor Advised Funds are most powerful during high income years when you are in a high tax bracket. This is because you receive a tax deduction in the year you fund a DAF. A tax deduction is simply a method to lower your taxable income.

Let’s explore an example of how one family leveraged a DAF to fulfill their charitable goals.

Austin is a sales executive and he had a strong commissions year, so his total income is $600,000, which puts he and his wife, Katie in the 35% Federal tax bracket. In this scenario, a $1,000 tax deduction lowers his tax liability by $350.

Taking it further, let’s assume his real estate taxes exceed $10,000 and his mortgage interest is $15,000 for 2024. Since these two sources total $25,000, Austin and Katie will take the Standard Deduction, unless they donate more than $4,200 to charity.

Austin and Katie typically make annual donations of $10,000. While they would itemize their deductions in 2024, in this scenario, they would not receive a tax benefit on the first $4,200 of donations. Like most people who donate to charity, the tax benefits are not the driving force behind why Austin & Katie choose to support their church and the organizations they value. However, if there is a way to satisfy their donations AND lower their taxes in a high-income year, now that’s a WIN, WIN!

Enter Donor Advised Fund into the conversation.

As mentioned above, you receive a tax deduction when the account is funded. However, you determine when and where to make charitable disbursements from the Donor Advised Fund. (There’s no additional tax benefits when you disburse charitable grants from your DAF).

So now that we know what a DAF is and why it could be attractive, let’s dive into how one could go about funding this account.

1. Gifting Appreciated Securities – 2024 has been a strong year in the stock market and as a by-product, many investors have large embedded gains on their stocks, ETFs, or crypto positions they purchased years ago at a low cost-basis. For any positions you’ve held longer than a year, you can contribute them directly from your investment account to a charitable organization. What are the benefits?

  • You avoid paying taxes on the gains.
  • You’re eligible to take an income tax deduction for the fair market value of your investment on the date you contribute.
  • Since the receiving organization is a 501(c)3 non-profit organization, they don’t have to pay taxes on liquidating your gift. This means the full amount goes to supporting causes you care about.

2. “Bunching” Multiple Years of Contributions into One Tax Year – Most taxpayers claim the Standard Deduction on their tax returns. As I mentioned above, you only receive a tax benefit for your charitable contributions if you itemize your deductions. One neat benefit of DAFs is that you can “pre-fund” donations for future years in one tax year and disburse the donations to charities of your choice over multiple years. So “bunching” enables you to get over the hump of the Standard Deduction to realize the tax benefits of charitable donations.

3. Reinvest Funds within your DAF to Amplify your Impact – While it’s great you can pre-fund multiple years worth of donations into one tax year, you may not want all of this money just to be sitting in cash. Another benefit of DAFs is that you can reinvest the proceeds within the charitable fund until you’re ready to disburse the funds to charity. Since the charitable fund is held at a tax-exempt organization, you don’t pay any taxes on the growth of your DAF balance, so the full proceeds go toward causes you care about.

If you’ve experienced a higher than normal income year and find yourself facing a large tax bill, then a Donor Advised Fund is an attractive tool to help lower your tax exposure and achieve your charitable intentions. Before you consider donating any exercised Incentive Stock Options, be sure to chat through this strategy with a tax professional or your financial planner.