For most investors, 2013 has been a pretty rewarding year. So as we close in on the last few weeks of 2013, it is clear that many of us will face substantial capital gains in taxable accounts as a result of riding these red-hot markets forward.
For investors that are looking for a useful, timely way to cut their tax bill, donor-advised funds might be just the ticket.
And you might just do some real good in the process!
Donor-advised funds all work in a similar fashion. Donors can make a contribution to the fund and claim an immediate tax deduction for this year. Then, once the contribution is made, you can then suggest a grant recommendation to support various charities, as well as determine the timing of such gifts.
The really appealing part of this is the fact the investment you make today might grow over time and continue to provide additional resources for the charitable organizations of your choice down the road.
Investors may contribute cash, appreciated stock, mutual funds or other valuables in some cases. These donor-advised funds don’t allow specific investment into some of my favorite mutual funds, but they still allow donors to choose a mix of investments based on the time horizon and risk desired. For long-term goals, I would suggest a stock-heavy mix.
Here are three donor-advised funds that make the process simple:
Fidelity Charitable is an easy way to get started in such a program, requiring an initial donation of just $5,000 to get started. Grants then can be made in increments as little as $50 to approved 501c3 organizations of your choice.
The plan charges an administrative fee of 0.6% annually or $100, whichever is greater.
Investment choices include asset allocation pools, as well as index and single-asset-class pools, which can match a donor’s time horizon with an appropriate mix of stocks and bonds.
Fidelity Charitable makes use of the Fidelity Asset Manager funds, which come in several flavors that allow a donor to choose a conservative mix or a stock-heavy allocation. This plan is great for all investors with a low minimum to get started and solid investment choices to grow the donated funds.
Vanguard Charitable appeals to donors with its signature low-cost index offerings that cover a broad range of asset classes.
Vanguard requires a minimum of $25,000 to open an account here, and grants can be made in increments of $500 or more to desired charities. Vanguard charges an administrative fee of 0.6%, which drops for investors that have $500,000 or more in the fund.
As mentioned before, index funds are the investment vehicle of choice in this program, and the donor has total control of the asset allocation.
T. Rowe Price Program for Charitable Giving
Solid investment choices and reasonable costs add to the appeal of this program. To open an account requires $10,000, and grant requests may be made starting at $1,000. The plan charges 0.5% as an administrative fee on assets.
For these investment pools, index funds are part of the mix alongside of some of the firm’s better actively managed funds. In some cases, funds that are closed to new investors are in the pool of funds available here. For example, T. Rowe Price Mid-Cap Growth (RPMGX) is a fine fund that is included in this program even though it is closed to new retail accounts.
Bill Wysor is the editor of The Relevant Investor. As of this writing, he did not hold a position in any of the aforementioned securities.