How Charitable Retirees Neutralize Capital Gains and NIIT with a DAF
Episode 40
How Charitable Retirees Neutralize Capital Gains and NIIT with a DAF
Published on June 24th, 2026
Episode Summary
Episode 40 of Retirement Tax Matters breaks down the mechanics of using a Donor-Advised Fund to help lessen capital gains taxes and the 3.8% Net Investment Income Tax on highly appreciated brokerage assets. Since the passage of the One Big Beautiful Bill Act made the higher standard deduction permanent, writing checks directly to a charity or church rarely cuts a retiree's tax bill. By shifting from giving cash out of a bank account to transferring low-basis stock directly into a DAF, you may be able to claim a charitable deduction while legally erasing some of the embedded capital gain taxes. This strategy can help you replace those appreciated shares with the cash you would have normally given away, effectively resetting your portfolio cost basis. Navigating this play requires keeping a close eye on the strict 30% adjusted gross income limit for security donations. Running an intra-year income projection in the spring or fall gives you the math and confidence you need to execute this strategy before the December 31st deadline closes your window of opportunity.
Key Tax Planning Questions
Question 1: Is a QCD or DAF better for retirees?
A Qualified Charitable Distribution and a Donor-Advised Fund are two separate financial vehicles that both allow you to support charitable causes, but they differ fundamentally based on the specific asset you choose to give away. Neither strategy is inherently superior to the other. The optimal path depends entirely on whether your tax debt lives inside a pre-tax traditional retirement account or within a taxable brokerage account.
A Donor-Advised Fund is generally the most effective tool when you own highly appreciated individual stocks or mutual funds outside of a retirement account. When you transfer long-term securities directly to a DAF, you claim an immediate charitable deduction for the full fair market value of the asset while erasing the embedded capital gains tax liability. This strategy is powerful during high-income windfall years, such as the sale of a business, because it allows you to bunch multiple years of charitable giving into a single tax year to drive down your tax bracket, while doling out the actual charitable donations to your chosen nonprofits over a multiple different tax years. You must remain mindful of the tracking limits, as cash contributions are capped at 60% of your adjusted gross income, while appreciated security gifts face a tighter 30% adjusted gross income limitation.
A Qualified Charitable Distribution is uniquely designed for retirees aged 70 1/2 or older who want to execute their giving directly from pre-tax traditional retirement accounts. If your portfolio is weighted heavily in tax-deferred assets and you face large mandatory distributions that you simply do not need to sustain your lifestyle, the QCD allows you to direct funds directly to a qualified charity tax-free. Because the distribution skips your bank account and goes directly to the organization, the income is entirely excluded from your adjusted gross income. This structural distinction is highly valuable for savers in the $2M–$8M range, because unlike a DAF deduction, a QCD lowers your adjusted gross income floor, which directly protects you from triggering the 3.8% net investment income tax on your investments and uncovers a massive planning lever to minimize upcoming Medicare premium surcharges.
Question 2: How do I set up a DAF?
In my practicing as financial planner (Providence Wealth Management, LLC), the vast majority of the families we serve custody their investments at Schwab. While there are many donor-advised fund providers across the financial services industry, utilizing Schwab's existing DAFgiving360 platform has been a great in our experience. Because these accounts are linked to the Schwab Alliance online portal, opening a DAF through DAFgiving360 allows the new account to appear right alongside the other investment balances you look at every single day. The platform does assess internal management fees, but the ease of administration it provides makes it well worth the cost. You can log into your dashboard, identify the specific long-term stock positions that you have held for more than one year, and easily transfer those shares into the DAF.
The transferred shares are typically liquidated into cash within the fund, allowing you to select from a handful of different investment models provided by the platform. I have noticed that a retiree's investment philosophy often shifts when managing a DAF portfolio. When highly appreciated securities are held in your personal name, you are typically inclined to hold onto aggressive growth allocations for the long haul. Once those assets are safely inside the fund, however, it can make sense to reduce market risk to make sure the cash is preserved for your favorite causes when it is time to distribute the money. The fair market value deduction is set the same day the stock is contributed to the DAF, not when the cash is eventually sent out to the nonprofit. Retirees frequently tell me that logging into the system to find their registered church or local charity is really easy. With a few clicks, the check is automated and sent out. Once you complete this cycle and use the cash reserves you would have normally given away to buy back those same shares in your core brokerage account, the strategy seems to start making sense: You have established an easy way to fund your giving goals while lessening capital gains and net investment income taxes.
Question 3: I bought 20,000 shares of Apple stock back in 2010 at $7 per share, and now that position is worth ~$850,000. I have always held onto these shares because I do not need them to fund my retirement, and my plan has been to leave them to my kids so they qualify for a step-up in basis at my death. However, I recently learned about a Donor-Advised Fund, and now I am second-guessing whether it makes more sense to do my charitable giving through my 4 million dollar traditional IRA via QCDs or by using these Apple shares. I am married, 71 years old, and also have a 1 million dollar Roth IRA. What should I do?
These types of client situations are always interesting to think through. It is always tempting to answer, but the more I have practiced as a financial planner working with retirees between $2M and $8M, the more weight I give to client psychology. I have had clients tell me they are never selling their shares of a specific stock because of what it has accomplished. I have had other retirees who are open to critique and are willing to sell down a portion of a wildly outperforming stock position like this example.
Since this person has charitable inclinations, they should consider if a donor-advised fund is a good fit for their giving strategy. Since this specific position has a massive amount of embedded growth with a very low cost basis, they might implement a strategy where they open a DAF and contribute the Apple share lots that are most highly appreciated. You have to navigate the stricter 30% adjusted gross income limitation for stock gifts compared to the normal 60% cap for cash, but this move allows them to receive a charitable deduction for the full market value, diversify the risk, and possibly avoid the capital gains taxes and the 3.8% Net Investment Income Tax if their taxable MFJ income is above $250,000. Then, they could take the cash they originally would have given to the charity and reinvest it right back into their brokerage account to buy back a more diversified position with reset cost-basis.
I do not mind clients holding onto individual stock positions they love, but I do like to tell the story of Sears. In many of my clients' lifetimes, they witnessed market dominance of Sears across many different industries. It seemed like a company that was insurmountable. All it took was was a company named Amazon to disrupt their position at the top. If you are holding onto a large concentrated stock position for a multi-decade timeline with the hopes of capitalizing on the step-up in basis at death, you are the business risk of that company. Does this person believe Apple continue its dominance for the rest of you and your spouse’s retirement?
The way these shares are registered in an account also introduces a critical planning point. If the brokerage account is jointly owned with their spouse the surviving partner could only receives a 50% step-up in basis when the first person passes away, depending on what state they live in and account type. If the shares are registered entirely in just one individual name, it may result in a 100% step-up for the survivor. Depending on your spouse's age and current health, these are some very important conversations that need to take place regarding account titling if you do choose to hold that stock indefinitely.
Comparing the long-term effectiveness of a Qualified Charitable Distribution against a donor-advised fund comes down to your expected taxable income, life expectancy, and legacy goals for your children. At 71 years old, you are in a unique window where you can execute QCDs immediately, but your mandated required minimum distributions from that 4 million dollar traditional IRA will not begin until age 75. Most retirees I interact with are very smart and can easily discern which strategy fits their puzzle best once they see the numbers laid out next to each other. That is why we use tax planning software to model these specific tracks instead of relying on a simple rule of thumb.
Full Episode Transcript
Adam: Good morning, and welcome to Retirement Tax Matters. I'm Adam Reed. This is Garrett Crawford, our resident CFP® professional. How are we doing this morning, Garrett?
Garrett: Doing pretty good. Excited to talk about DAFs. Everybody out there probably loves talking about DAFs too, right?
Adam: Oh, yeah, the old donor-advised fund. How can I give all this money away? A lot of the people listening to our podcast have done a good job saving it. Now they're all thinking, "How do I get rid of all this?" That's probably not what they're thinking, but if we do have charitably inclined people listening, and a lot of our clients, there's some really cool tactical maneuvers you can use with a donor-advised fund. I wouldn't be surprised if a lot of people listening really get a kick out of this, even if it's not something they use, because it is such a unique way to take care of a problem that a lot of people in this higher net worth space have. You can use it in really cool ways. So I'm excited to jump into donor-advised funds today.
Garrett: Yeah, and so I came up with the headline today for the video, and I thought, man, we work in such a great industry using jargon and three-letter words, but we're talking about DAFs and NIIT and long-term capital gains. For some people out there they are like, "Yeah, you guys are speaking my language." If you were like me showing up to my engineering internship, "What's a var?" All kinds of language. And so the headline was kind of a spoof on all these abbreviations. But we're going to break it down for you like nobody else can today, right, Adam?
Adam: Some alphabet soup. Hey, and this is probably a good time too just to remind people our year-end tax planning checklist, donor-advised funds would be a great thing to be thinking of as you're going through that. So go down in the description below. It's in there. It takes you to a link to our website, and we'll send that to you. And I think it'd be a huge asset for you as you're thinking through how to give, how to save on taxes, and how to do this whole thing efficiently. That checklist is going to be the gold standard for what you should be thinking through each year as you do it. So, definitely point people in that direction as we jump into the deep end, the deep waters of DAF—donor-advised funds. So Garrett, I think a good place to start, and our goal today is what is a donor-advised fund, who does it make sense for, and then how do you practically just do it? If you watch this video and you're like, "This is a great fit for me," or if you come and meet with us and we recommend it, how would you actually do it? So why don't you kick us off there of what is a donor-advised fund?
Garrett: Yeah. And so we have done a previous episode where we just generally talk about charitable giving and we have a section in there about donor-advised funds, but our goal today was to try to tighten this up into one quick episode, like a phone call with a client. And I would just say that probably a lot of retirees out there are pretty familiar with this idea of a qualified charitable distribution, and it's actually really cool. It should be part of your consideration. But we're not going to talk about the QCD today. We're talking about the DAF, the donor-advised fund. I guess I would start with the fact that the financial industry has a lot going on when it comes to charitable giving. I remember in my CFP® professional study days and, Adam, it'll be in your estate planning section when you get there, you get into all these complicated strategies. There's a charitable remainder unitrust, a charitable remainder annuity trust. You can donate highly appreciated securities. But this other one I feel like is an account that has become popularized in the past seven or eight years. When I started I didn't hear about it a lot, but over the recent years, if I have a client that's charitably inclined and has a large brokerage account, I'm bringing up this idea of, "Have you ever considered a donor-advised fund?" I tell my clients a lot, "If you can just hang in there for a year, and if you just trust me and open up this account, I think you'll like it." A few of our bigger clients I've convinced to open up a DAF and fund it, and one says, "Garrett, I love the donor-advised fund. I'm so glad you recommended it to me. It's so easy, and I wish I would've done that before." What is a donor-advised fund? It's actually just like an account we custody at Schwab. You can go to schwab.com and open up a donor-advised fund, just like you can open up an IRA account, a Roth account, or a brokerage account. Schwab uses a group called DAF Giving 360. It doesn't really roll off the tongue; it used to be called Schwab Charitable. I like that name better. But if you go to DAF Giving 360, you can open up an account. It can be on the same Schwab online account login, and it has an account number. You get to name what you want your donor-advised fund to be, and then you can fund it. It's basically an account that you open where you can transfer highly appreciated securities. Actually, you could transfer any security, but for the people listening, it's going to be that high net worth retiree between two and eight million that we're talking to, where there's a high correlation where they've invested in stocks that have grown tremendously. They're looking at that and saying, "Hey, I don't want to liquidate anything, and I don't want to pay that 15% to 23.8% long-term capital gain, but I am charitably inclined, so maybe I've heard about just donating that stock directly." The cool part about a donor-advised fund is that you can transfer those highly appreciated securities into the account, get credit for the full market value of that stock on the transition date, avoid the appreciated long-term capital gain, and what sets the donor-advised fund apart is that you get to control when you actually give it. A lot of our retirees out there listening might have had one really big year. Maybe their income was in the 24% bracket, they get a big severance payout, or maybe they sell a business—something big happens and their income spikes tremendously. It's a wonderful year to use a donor-advised fund because you could fund a giving account. You move highly appreciated securities over to the donor-advised fund, you get a deduction, but all that money doesn't have to go out to the charity or to the church in the very first year. You can dole it out over time. This offers control, not being forced to give it all out in one year, but you get the tax deduction in one year. That big client I mentioned really likes it because it's so easy. They've already got all the charities built into the Schwab website. So if you've got a 501(c)(3), you type in the name, they've already got the address stored, and you can actually do the giving anonymously. If anybody contributes to political parties, boy, if you contribute one time, you end up getting harassed for the rest of your life. You can make contributions anonymously to these groups that are untraceable back to you. From a privacy perspective, I think it is very simple, great tax-wise, lets you give anonymously, and protects your mailbox. It's a good tool to think about.
Adam: It almost reminds me too, if people are struggling to wrap their mind around this tax benefit in one year but giving afterwards, it's kind of like itemizing if you bunch deductions.
Garrett: Oh, yeah. Sure.
Adam: Where it's like, hey, I can throw all these in one year to benefit my taxes, but next year maybe I take the standard deduction or I can't do it as much. You put all of the giving into one year, you bunch it into one year, and then you can actually give the money even though you've already gotten the tax benefits of it in that one year. I know you've got some notes here on who this is a good fit for. Because as I was thinking on my way over here this morning, almost every financial tool has an ideal use, right? It's just like a tool in a tool belt. A hammer hits a nail really well. A screwdriver screws a screw really well. So who is this a good fit for, who might this serve well, and what are some things where if you see them, if you're going through the year-end tax planning checklist, some alarms should go off in your head, "Oh, I should be thinking about a donor-advised fund"?
Garrett: Yeah. So I think number one, when it comes to charitable giving, it just doesn't make sense to give money to a 501(c)(3) or a charity if your goal is just to save taxes. I would champion this: I would want people that are giving to be giving out of an overflowing generosity within them, and the tax benefits are to the side. It's not gonna make sense to give away $100,000 if you're just trying to save 35% in federal taxes. But when I'm interacting with people, the ones that stick out to me are those who have a very highly appreciated brokerage account. Let's say they invested $100,000 into something and over a decade or two now it's at a million dollars. Maybe it's great performance, maybe it's ongoing savings, but there's an appreciation that exists in there where there's some hesitation to want to take money out because they're afraid of the taxes involved. The other part would be—and this is a big financial planning opportunity—if you're just writing a check to the charitable organization that you're a part of out of your checking account, and you've got all these capital gains built up in a brokerage account, call me, email me, we can talk and I might be able to save you some money. Depending on how high your income is, we can effectively neutralize those long-term capital gains, and that's what this episode is about. Instead of writing a check to your 501(c)(3) qualified charitable organization from that money in your bank account that you've already paid taxes on, instead, what if we took brokerage account, highly appreciated securities, funded a donor-advised fund account, got you a charitable deduction just like if you were writing a check to that charity? Let's say you want to fund a donor-advised fund with $100,000 so that it's not all going to the charity in one year. Maybe that's three or four years' worth of giving. You do $100,000 into a donor-advised fund, and then you take that extra cash sitting in your checking account that you would normally write those charitable contribution checks for, and we move it from the checking account back into the brokerage account. Effectively what we're doing is eliminating the capital gains on the highly appreciated securities and replacing that with the cash that you would normally write a check to the charitable group for.
Adam: Mm-hmm.
Garrett: That's how you neutralize, but there's a couple other things worth mentioning when we're talking about taxes. In the headline of this video, we're talking about long-term capital gains, which is what I just mentioned. But there's also this thing called net investment income tax. For a lot of our retirees between two and eight million, they're gonna have a pretty high income and one of the penalties that can arise is called the net investment income tax. If you're a single person, it's when you have adjusted gross income or modified adjusted gross income over $200,000. If you're married filing jointly, it's $250,000. I was refreshing this morning, the last time they adjusted those numbers was a long time ago.
Adam: Well, let's take just a quick second. We did a singles video a couple weeks ago for all of our single clients. This is one of the few financial numbers that isn't half of the married number.
Garrett: Yeah, sure.
Adam: So, good job single people. This is the one you can hang your hat on. For the NIIT, we actually get some benefit here from being single. One of the few places.
Garrett: Yeah. And so those numbers, the 200,000 and 250,000, haven't been adjusted in a long time, and so it's catching more and more retirees. I remember 13 years ago when I was here, it was still 200,000 and 250,000. As retirees' accounts are growing, their income is increasing with inflation and great market performance, and not only are their long-term capital gains getting hit with a 15% or a 20% rate depending on household income, but they're adding in a 3.8% net investment income tax on that income. So the donor-advised fund is effectively helping you eliminate not only a long-term capital gain, or a short-term capital gain if you donate within under 12 months, but also the additional net investment income tax. This is not chump change, and especially for a lot of our listeners, if you're writing a check to your charitable group, there's an opportunity here to save money. Then the last little one I wanted to mention is this AGI limitation. You can't just do whatever you want. You can't add 5 million or 2 million to a donor-advised fund and get that much of a charitable deduction. They limit it to 30% of your AGI when you're donating securities or property. If your income was $200,000, if I'm doing my math right, you would be limited to a first-year deduction of 30% of your AGI, which would be $60,000. If you donated $100,000, you could only take a $60,000 charitable deduction in that first year. However, that 40,000 you're disallowed from taking is allowed to carry over, I believe it's for five years in the future. You may be eventually able to take advantage of that. But where I see a lot of clients implement a donor-advised fund contribution is we would maybe go up to the 30% AGI level, which can lower income and could cause greater room for a Roth conversion. We're paying attention to how much their normal itemized deductions or standard deductions are so that we can optimize that. I don't naturally like to get into that five-year carryover rule if I can avoid it. Donor-advised funds work really well for avoiding long-term capital gains, net investment income tax, and also the bonus, creating more room for Roth conversions.
Adam: So I guess we'll wrap up here with if somebody's going through, they've downloaded the year-end tax planning checklist, they're going through it and they say, "You know what? I see some capital gains in here in my brokerage account..." Because a lot of our clients at least, and probably people listening, maybe were self-employed and maybe they just opened a brokerage account and just started throwing money at it as they had good years and bad years, and that was easier for them. Maybe they've got this big, highly appreciated brokerage account and a smaller IRA. As they're looking at that and see some things, how do they actually go about setting up a donor-advised fund? How do you implement that into your plan and then how do you utilize it?
Garrett: Yep. So I just know Schwab better. I think Schwab has a great platform for the donor-advised fund. I'm sure Fidelity and Vanguard have something similar, but I've been very impressed with Schwab. You'd wanna Google DAF Giving 360. You'd wanna read about the fees and the process of opening up an account. It's not very hard at all. One thing we didn't mention is that your donor-advised fund can be invested in the market, and I think this is a whole other topic that we do one day, but how do you invest money that you're gonna give away? Are we putting it all in Nvidia stock and hoping that the charitable group just kills it? I would say for most of our clients, when you put money into a donor-advised fund, your goal is not growth, it's preservation. You may be investing a donor-advised fund differently than you would your own personal investments. But you'd wanna open up a donor-advised fund, and if you already had an account at Schwab, it makes the transfer process super simple, which is another point in the favor of consolidating and staying on one custodian. It's like having a checking account here, a savings account here, and then a brokerage account at a different company. When we can create synergy, that's a good thing.
Adam: Garrett loves tax-return-driven financial planning. He loves Holistic Planning, which is the software we use. He also loves this term ROH, return on hassle. He loves simple, straightforward layouts.
Garrett: The less we manage, the less we mess up, I think.
Adam: Let's not reinvent the wheel here.
Garrett: Yeah. And so if you can have your Schwab brokerage account and your Schwab donor-advised account together, that transfer process is super simple. It happens the same day. It's automatic. You can do it online. Then you're gonna pick an investment strategy. There are some fees. I wanna say it might be around 0.4%, but again, it's a charitable thing, I think most people are okay with that. So there is a management fee, but once you have that funded, you're gonna get a tax form showing that later on in the year. But you're gonna be able to just go into your donor-advised portal, find a charity, and send that money out to the organization with no problem. I guess I would counsel people it's not that hard, but there is friction in this, and that's where with a lot of our clients, if we just hold their hand through the process, once they get through year one, it's like a eureka light bulb moment. Ah, that's how it works, and then they're good to go.
Adam: Yeah, absolutely. It's another great tool to have in the tool belt along with QCDs if you're trying to do some charitable giving. Those are the two big ways that make a lot of sense, especially for people with a big brokerage account or low basis stock, and even people that are still growing some of those things too. I know we talked about how they're replacing them as you go. You can give off the top, cut down your basis, and then refund it with new cash. There are some really cool different ways you can utilize giving. Like you said, the heart behind giving should be, "I wanna give. I wanna help other people. I wanna benefit others." For somebody like me, it may be my church. For my brother and his wife, it could be something like the dog shelter. They spend a lot of time over there and love animals. It doesn't matter where it's going, it's the heart behind it and then just the benefit of, "Man, this is great. I get to feel good, enjoy doing this, and I get some tax benefits."
Garrett: And I think my clients find this is a great experience. This is easy. Sometimes, like I had a case yesterday, I had to go to the website, look up the address, fill out the form, and sign the form. It's like a few minutes of your day. You just go right in, find the charity, hit send, and you are good to go. I would end this by saying the donor-advised fund is not the be-all end-all solution for everybody, but it is an amazing charitable gifting account tool. Everybody's situation is gonna be unique, but a donor-advised fund may be something you should consider.
Adam: So, the thumbnail shouldn't be, "Every single human needs a donor-advised fund right now" or anything like that.
Garrett: You can do that just with a little asterisk that says, "Well, maybe not, really."
Adam: Or with a double question mark or something. But anyway, thank you guys for tagging along. Make sure to remember the year-end tax planning checklist. What a great resource, especially since we're almost to the middle of the year. It's a good time to start making some projections and then fine-tune towards the end of the year, so a great time to check that out. Great time to look into donor-advised funds, too, and start thinking, "Hey, is this a year? Do we have a big sale? Do we have a home sale? What's going on this year? Could we use something like this?" Start planning for the end of the year, because if you wait until October or November, you're scrambling. Summertime's a great time. Sit down at the beach, bring a book, an umbrella drink, and start your year-end tax planning now. We're a bundle of fun over here at Retirement Tax Matters. But anyway, thank you guys for tagging along. Like, subscribe, and do all the different things. Check us out on Apple, Spotify, YouTube, and check out our newsletter. It really adds a ton of value, free of charge. We appreciate you guys tuning in. I'm Adam Reed. This is Garrett Crawford. We're Retirement Tax Matters.