Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

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fireman
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Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by fireman »

I became a Boglehead convert about 4 years ago and have reworked my portfolio over the last several years to a 3 fund portfolio. I have one remaining individual stock that is only about 1% of my total portfolio. I am considering the following to convert this individual stock to VTSAX and avoid paying any capital gains tax:

Establish a DAF (donor advised fund) and annually donate a set amount (e.g., $5K) of the stock to the DAF. Within the DAF, the individual stock could then be sold without incurring any capital gains tax. I would then make our annual charitable contributions (e.g., $5K) from the DAF instead of cash flowing these contributions. The dollars that would have been spent cash flowing the charitable contributions would then be diverted to VTSAX in my brokerage account. The net result (I think) would be to convert the individual stock (held in a DRIP account) to VTSAX in my brokerage account without incurring any capital gains tax.

The only negative that I can think of is the complication of having a DAF and the associated drag (maybe 1%) that can be expected with the DAF. However, I have been considering establishing and maintaining a DAF account for other purposes anyway so this might not be too much of a negative for me.

Any input on this strategy is appreciated.
Gill
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Re: Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by Gill »

Your plan sounds fine but why don’t you transfer the holding all in one year and possibly get a tax deduction from doing so?
Gill
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bluebolt
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Re: Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by bluebolt »

Perfectly fine strategy. Some charities take stock donations directly, so you could donate your stock directly instead of opening a DAF. Especially if you are going to donate in the year you transfer to your DAF, that would also work fine.
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vanbogle59
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Re: Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by vanbogle59 »

This appears to me to be just a fancy way to just donate the appreciated shares.
I'm no tax expert, but both seem like perfectly wonderful ideas. Whichever works, because you deserve full credit for your generosity.
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fireman
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Re: Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by fireman »

@Gill: Thanks for the suggestion. I will consider whether donating all at once and itemizing makes sense.

@bluebolt: Understood regarding some charities taking stock directly and agree that this could be simpler. I was looking to apply this strategy to certain charitable contributions that we make weekly/monthly but maybe I should just donate one time annually to make things simple from my side (not sure if this is best to the charitable recipient entity though).

Thinking about this some more: Might it make sense to continuously donate appreciated securities (e.g., VTSAX) annually instead of cash flowing charitable contributions? For example, the lot or lots of VTSAX with the greatest gains could be donated (via DAF or directly) and cash flow formerly used for charitable contributions diverted to repurchasing the donated VTSAX. It would seem that this could be used to raise one’s basis in VTSAX over time.
bluebolt
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Re: Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by bluebolt »

fireman wrote: Wed Nov 24, 2021 9:19 am @Gill: Thanks for the suggestion. I will consider whether donating all at once and itemizing makes sense.

@bluebolt: Understood regarding some charities taking stock directly and agree that this could be simpler. I was looking to apply this strategy to certain charitable contributions that we make weekly/monthly but maybe I should just donate one time annually to make things simple from my side (not sure if this is best to the charitable recipient entity though).

Thinking about this some more: Might it make sense to continuously donate appreciated securities (e.g., VTSAX) annually instead of cash flowing charitable contributions? For example, the lot or lots of VTSAX with the greatest gains could be donated (via DAF or directly) and cash flow formerly used for charitable contributions diverted to repurchasing the donated VTSAX. It would seem that this could be used to raise one’s basis in VTSAX over time.
Small charities especially will almost certainly prefer you giving one stock gift a year, though you may want to ask them.

To your latter question, yes. This is one of the reasons why people donate appreciated securities.
sycamore
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Re: Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by sycamore »

fireman wrote: Wed Nov 24, 2021 9:03 am The only negative that I can think of is the complication of having a DAF and the associated drag (maybe 1%) that can be expected with the DAF
The drag will be a bit lower than 1%. At Vanguard Charitable for example they charge 0.60% administration fee, and each investment option has its own expense ratio - they offer various Vanguard funds which have pretty low ERs, under 0.10%. Fidelity fees are similar.

Also, agree with the previous suggestion about making a bigger donation up front so you can go well over the standard deduction and make itemizing worth it.
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Stinky
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Re: Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by Stinky »

Gill wrote: Wed Nov 24, 2021 9:09 am Your plan sounds fine but why don’t you transfer the holding all in one year and possibly get a tax deduction from doing so?
Gill
I agree with Gill. Donate it all at once to get a tax deduction.

Within my Fidelity DAF, I’m invested in a Total Stock Market fund, so I still have equity exposure on the donated amount. The 0.60% cost of the DAF is substantially offset by the tax savings on the dividends on the equities in the DAF.
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mhc
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Re: Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by mhc »

fireman,

you are on the right track.

A DAF is great for playing the alternating itemizing and standard deduction game to minimize taxes.

If possible, always donate shares with LTCG instead of cash. A DAF can make this easier to manage. I set my recurring donations and just let it run for a few years. I usually have it issue a grant to the charity every 6 months.

The account fee of a DAF (0.6%) is real, but so are the taxes on distributions from a taxable account. They are usually below 0.6%, but they usually are not 0%.

I have really appreciated my DAF. It is really easy to use. I think it is the way to go until you can use QCDs.

Another feature of a DAF is that you can make anonymous donations.
feehater
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Re: Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by feehater »

I’m in a similar position except I already own vtsax et al in the taxable account (with a low basis from 2020 tax loss harvesting). I am on the fence about whether it’s worth it for a similarly “small” donation. In my case since I’m happy about my asset allocation, I would be doing it solely to raise the basis on the index funds in my taxable account. So I would be looking at paying fidelity the minimum of $100 a year just for the privilege of raising my taxable account’s basis. And the wiki makes donating directly to a charity sound like a hassle when it involves emailing vanguard and hoping they donate the correct shares. So I’m probably leaning towards still donating cash for a while longer until the gains in our taxable account are large enough (and maybe our donations increase) that it seems worth the hassle. Obviously your situation also involves getting rid of an individual stock you don’t want.
oxothuk
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Re: Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by oxothuk »

Gill wrote: Wed Nov 24, 2021 9:09 am Your plan sounds fine but why don’t you transfer the holding all in one year and possibly get a tax deduction from doing so?
Gill
Careful there. IIRC, there is a cap on how large a deduction you can take for funding a DAF - maybe 30% of AGI? And on the lower end, you don’t get any tax relief until after you’ve exceeded the standard deduction
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fireman
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Re: Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by fireman »

Thanks for the replies. I have a couple follow-up comments/questions:

1) I understand the idea behind loading contributions in a single year to take advantage of itemizing. However, under current law, I believe I would need charitable contributions above $15K to itemize (~$25K standard deduction less $10K SALT items). This might be higher than I want in the near term but I will consider this down the road.

2) Fidelity and Schwab seem like leading contenders for my DAF. Vanguard would be more convenient in some ways but the threshold amounts are too high for me ($25K to open, $5K minimum for additional contributions and $500 minimum grant to charity). By comparison, Schwab has no minimum to open, no minimum for additional contributions and a $50 minimum grant to charity, all of which are appealing. I believe Fidelity is the same or similar. I already have Schwab checking account and brokerage accounts so I am leaning toward Schwab. Any reason to consider Fidelity instead?

3) Above, I mentioned that I would be initially funding the DAF by contributing/donating an individual appreciated stock. Once this has been fully "converted" as outlined above, I would then start converting from my regular brokerage account, which is invested 100% in VTSAX. Currently, I make monthly purchases of VTSAX but now I am thinking that I should instead be purchasing VTI instead so make future donations to my DAF easier. Is this correct?
IowaFarmBoy
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Re: Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by IowaFarmBoy »

oxothuk wrote: Wed Nov 24, 2021 3:41 pm
Gill wrote: Wed Nov 24, 2021 9:09 am Your plan sounds fine but why don’t you transfer the holding all in one year and possibly get a tax deduction from doing so?
Gill
Careful there. IIRC, there is a cap on how large a deduction you can take for funding a DAF - maybe 30% of AGI? And on the lower end, you don’t get any tax relief until after you’ve exceeded the standard deduction
I'm going from memory here so please verify. Historically, I think the deduction for LTCG property was 30% of AGI and deduction for other types (including cash) was 50 or 60% of AGI. In 2021, the CARES act allows a deduction for charitable contributions up to 100% of AGI. So this could be a good year to fund heavily. I think it may revert back to old limits in 2022.

Also, the cap is on deduction for a gift to any charity, not specifically a DAF.
fourwheelcycle
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Re: Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by fourwheelcycle »

I decided to simplify our savings to a portfolio that is all TSM, 500 Index, and Intermediate Term Bond. Our only other holdings were one individual stock and a few energy, small cap, and international index funds. I donated the stock holding to a Vanguard DAF, staying under the 30% of AGI rule, and I will donate the other non-core index funds to the DAF in future years.

As others have noted, the administrative fee drag at Vanguard Charitable is less than 60 basis points, since it is reduced by the income tax you would have paid on dividends from the holdings you donate to the DAF.
Skeet
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Re: Good Idea?: Convert Individual Stock to VTSAX via donating to DAF to Avoid LTCG Tax

Post by Skeet »

I've been considering a DAF with Fidelity, so have been researching this. I'm confused on 2021 Tax, though. The IRS says:

"The law now permits electing individuals to apply an increased limit ("Increased Individual Limit"), up to 100% of their AGI, for qualified contributions made during calendar-year 2021. Qualified contributions are contributions made in cash to qualifying charitable organizations.

As with the new limited deduction for nonitemizers, cash contributions to most charitable organizations qualify, but, cash contributions made either to supporting organizations or to establish or maintain a donor advised fund, do not. Nor do cash contributions to private foundations and most cash contributions to charitable remainder trusts."

I found that comment here: https://www.irs.gov/newsroom/expanded-t ... -itemizers

Am I mis-reading/understanding, or is a DAF contribution NOT eligible for the 100% of AGI limit? It appears to me that it remains at 30%. Your thoughts are appreciated.

Skeet
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