A Few Financial Planning Tips for Year End

Consider Donor Advised Funds as a Vehicle for Your Charitable Giving. One of the more rewarding aspects of our jobs is helping our clients with their philanthropic goals, and indeed, many turn their thoughts to charitable giving at this time of year. Donor Advised Funds may be a useful tool worth considering to maximize the tax efficiency and convenience of your charitable giving. A donor advised fund is itself a public charity that in turn allows the donor to recommend grants to other qualified non-profit organizations.  Advantages include:

• The ability to take an immediate tax deduction for gifts to the donor advised fund. It may be particularly advantageous to consider donating appreciated assets, which has certain tax benefits compared to donating cash.
• The flexibility to choose to invest donated assets for growth (usually in a diversified mutual fund) or recommend grants immediately;
• The donor retains the ability to direct which charities to support.
• Convenience and low cost.  Compared to establishing a private foundation, setting up a donor advised fund is relatively inexpensive and simple.

A typical scenario might involve a client establishing a donor advised fund by gifting appreciated stock, then recommending smaller grants to charities of their choice over the following years.

Donor advised funds are administered by various financial and community organizations. As a starting point, you might want to consider the following offerings:

Vanguard Charitable Endowment - https://www.vanguardcharitable.org/

Fidelity Charitable Gift Fund - http://www.charitablegift.org/

Schwab Charitable Fund - http://schwabcharitable.org/

Should you pay investment management fees on IRA assets with outside money or not? Clients of Bristlecone have a choice when it comes to paying investment management fees on IRAs and other qualified accounts: they can either have the fee debited from the account or have it debited from another (presumably taxable), account. We recommend you consult your CPA to help determine whether paying investment management fees on an IRA from an outside account would be deductible and beneficial in your situation. What are the considerations?

First, to be eligible for a deduction, the fee must be paid from funds outside the retirement account.

Second, outside funds used to pay the investment management fee on an IRA are not considered a contribution by the IRS. This is important and is not the case with brokers' commissions for trades within the IRA; paying commissions with outside money would be considered a contribution to the account.

Third, it is important to recognize that the issue is mostly one of timing of taxes, not avoidance altogether. Distributions from IRAs (not including Roth IRAs) are taxable, so the money from inside the IRA that would have gone to investment management fees will instead be taxed on distribution.

Generally speaking, paying fees from outside the IRA will not make sense for clients who come under the alternative minimum tax or who do not itemize deductions. Conversely, paying fees from outside the IRA may make more sense for clients who can deduct the fees from their taxable income, who are farther from retirement and the distribution stage, or who anticipate a similar or lower tax bracket upon retirement.