Simplify Your Charitable Giving with a Donor Advised Fund

Jane Young, CFP, EA

A donor-advised fund (DAF) is a charitable giving vehicle established at a public charity.   Contributions to a DAF are tax deductible when they are made but there is no time limit on gifting to the eventual charitable beneficiary.   Think of a DAF as a central holding place or savings account for your charitable dollars

If you donate to several charities every year or you want to become more strategic in your charitable giving, a DAF can simplify the gifting process.  A DAF can also simplify the process of gifting appreciated, non-cash assets.  Opening a DAF is similar to the process of opening any other financial account.  Once the account is open you can easily make contributions to your account and, when you are ready, make distributions to a qualified charitable beneficiary.  There is no delay in establishing the fund and there are no start-up costs.  You select the name for your DAF and if you prefer, donations can be made anonymously.  Your contributions are irrevocable and immediately tax deductible.  Funds held within the DAF are invested, based on your gifting timeframe, and grow tax free.

In recent years DAFs have grown in popularity as an alternative to private foundations.   Private foundations can be expensive and time consuming to establish and operate.  They are subject to extensive federal and state regulations resulting in substantial legal and accounting fees.  The administrative and management fees for private foundations are also much higher than DAFs, generally ranging between 2.5% to 4% per year.  Foundations must annually grant at least 5% of their net asset value, regardless of how much the asset earned in the previous year.  A DAF does not have annual distribution requirements.  Additionally, foundations have to pay an annual excise tax of 1% to 2% of net investment income.

A DAF can help you manage your taxes by providing an immediate tax deduction on contributions into the DAF, even if you spread the gift to the ultimate charity out over several years.  A DAF is especially beneficial in gifting appreciated non-cash assets.  With a DAF you can gift the full value of stock or stock mutual funds to a charity without incurring taxes on the gains.  Many charitable organizations find it difficult to accept non-cash donations where a DAF can coordinate the administrative process and hold the funds until you are ready to gift them to the charitable beneficiary.

The disadvantage to using a DAF is the annual administrative fee which usually runs around .60% to .85%.  If donated directly, this money would go to your designated charity.  If you are considering a DAF compare administrative fees, contribution minimums, investment options and their grant issuing process.  The four largest providers of DAFs are Fidelity Charitable, Schwab Charitable Foundation, Vanguard Charitable Endowment and the National Christian Foundation.  You can also open a DAF with the Pikes Peak Community Foundation or other community or public foundations.

What to Consider Before Taking a Lump Sum Buyout of Your Pension

Jane Young, CFP, EA

In an effort to decrease pension obligations, many corporations have been offering current and former employees a lump sum to buyout their defined benefit pension plans.   At first glance this may seem like a great opportunity and pension administrators say that 50% to 70% of those offered take the lump sum.   Analyze this carefully; it’s an important and complex decision that is different for each individual situation.

Generally, the lump sum offer is based on an actuarial calculation indicating the present value of a pension’s income stream, based on your age and a reasonable rate of return.  You can evaluate the relative value of the lump sum being offered by calculating the internal rate of return of the income stream or by running present value calculations using various rates of return and life expectancies.  A fee-only financial planner or an accountant can help you with these calculations.

Life expectancy, which is readily available on the internet, is one of the biggest factors in determining the advisability of taking a lump sum.   However, the typical life expectancy may not be applicable to you.  Healthy individuals with a history of longevity in their family may live longer than the standard life expectancy.   Alternatively, individuals with health issues or a family history with shorter life spans may anticipate a shorter life expectancy.  Generally, monthly payments from a pension are better if you anticipate a longer life expectancy and a lump sum is better if you anticipate a shorter life expectancy.

Other considerations include having the discipline to invest the funds from a lump sum to be gradually used throughout retirement rather than spending the entire amount over a short period of time. Also consider your comfort with investing the lump sum and your willingness to take some risk to earn a reasonable return.    A lump sum may be a good option if you need access to a large amount of money in the short term.

It’s good to strike a balance between fixed income streams that can provide more certainty and an investment portfolio that is more volatile with the potential to earn a higher return.  If you have another pension consider a lump sum and if you don’t have a pension, a fixed income stream may add some stability to your financial situation

Another huge factor in the decision is the safety of your pension.  Pensions offered by most public corporations are insured by the Pension Benefit Guarantee Corporation (PBGC) up to a limit of around $60,000 for a single life and $54,000 for a 50% survivor benefit.  Unfortunately, state and local pensions are not covered under the PBGC.   The pension administrator can tell you if your pension is insured by the PBGC and how well it is funded.   Anything under around 80% is a red flag.  If your pension is not insured and is not well funded it may be wise to take the lump sum.

Pre-retirement Checklist for a Worry Free Retirement


Jane Young, CFP, EA

Retirement represents a huge change in your lifestyle and finances.  Plan and prepare ahead of time to enjoy a comfortable and rewarding retirement.  Think about what your retirement looks like – will you retire completely or will you gradually transition into retirement?  Consider transitioning from your current career to a part time job doing something you really enjoy.  Think about what you will do in retirement, where will you live and what kind of lifestyle you want.

Consider the emotional impact of retirement.  Generally, your career provides a major sense of accomplishment, meaning and significance.  Most of your social life may also come from work relationships. Seriously consider the impact retirement may have on your self-esteem and personal identity.  Explore ways to spend your time in retirement on meaningful and rewarding pursuits, in addition to the fun activities you previously had no time for.

Evaluate your current spending habits and develop a realistic retirement budget.  Remove expenses you will no longer incur such as contributions into a retirement plan and add expenses that may increase in retirement such as additional travel and insurance expenses.  Build in some flexibility, plan for unexpected expenses and maintain an emergency fund.

Discontinuation of employee benefits, upon retirement, will probably result in the need for additional health and dental insurance.  Research Medicare costs and coverage along with the cost of supplemental health insurance that may be needed.  Think about how you may cover the possibility of long term care expenses and evaluate buying long term care insurance.  As you approach retirement you may be able to reduce or discontinue life and disability insurance coverage.

Manage your debt and take care of major maintenance or remodeling projects prior to retirement.  To the extent possible, pay off credit cards, vehicle loans, student loans and your mortgage.  If you can’t pay off your mortgage but plan to refinance, do so prior to retirement.  It may be difficult to refinance after retirement when you have no earned income.

Review your Social Security and Pension benefits and make some preliminary decisions on the best time to begin taking benefits.  Consider the possibility of losing a spouse when making these and other major retirement decisions.

Run some retirement planning scenarios with a financial planner to determine when you can afford to retire and how much you can afford to spend in retirement.  Based on these scenarios develop a plan to create a tax efficient income stream to pay expenses that aren’t covered by Social Security or Pensions.

Develop and implement an investment plan to support your short term income needs while providing reasonable growth to carry you through retirement.   Your short term money should be held in safe fixed income investments.  But your long term money should be invested in a diversified portfolio to provide long term growth for the 30 to 40 years you may spend in retirement.

Small Business Owners Need a Retirement Plan

Jane Young, CFP, EA

When you leave the corporate life to become a business owner, you lose the opportunity to continue contributing to your 401k.   You can’t replace the employer match, if you received one, but you can create your own retirement plan.

In the early years, as your business is ramping up, you will incur some start-up expenses and you may experience a significant drop in personal earnings.  This can be a great time to consider a Roth IRA.     Previously, you may have earned too much and you may have been in a higher tax bracket where you needed the tax deferral on money contributed to your 401k.

With a Roth IRA, your contribution is made with after tax money and you don’t receive a current tax deduction.  However, on the bright side, you pay no taxes upon withdrawal in retirement.  This is the opposite of a traditional retirement plan, such as a 401k, where contributions are deducted from your current income and you owe regular income tax on the entir


e amount withdrawn in retirement.

In 2017, Roth IRAs have an income phase-out range of $118,000 to $133,000 for single filers and $186,000 to $196,000 for joint filers.  If you have maximized your Roth contribution or are ineligible for a Roth IRA, consider Investing in a traditional retirement option.  Some straight forward options, that won’t require a team of accountants, include a traditional IRA, a Simplified Employee Pension (SEP) or Savings Incentive Match Plan for Employees (SIMPLE).

You may be eligible to contribute to a traditional IRA however your ability to deduct your contributions may be reduced if you or your spouse is an active participant in a qualified retirement account (401k, SEP, and SIMPLE plans).  The combined annual contribution limit on traditional and Roth IRA accounts is $5,500 plus a $1,000 catch-up if you are over 50.

If you want to increase your contributions and don’t have employees, a SEP can be a good option.   The maximum allowable contribution is 25% of income or $54,000 for 2017.  A SEP can be expensive with employees, because the entire contribution is paid by the employer.   Each year the employer decides how much to contribute and this is given to the owner and all employees who have attained age 21, have been employed for 3 of the last 5 years and have earned at least $600.

If you have employees, a SIMPLE plan may be more economical because your employees make elective tax deferred contributions.  The employer is only required to make contributions to the plan as matching contributions up to 3% of compensation or as non-elective contributions.  In 2017 the limit on the amount employees can contribute is $12,500 plus a catch-up of $3,000 for individuals over age 50.

As your company grows consider a 401k or profit sharing plan.  These can provide higher contribution limits but they are more complicated and involve more sophisticated reporting.

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