You write that money should be added to DAFs in years when your marginal tax rate is high. What should we do with money earned in other years? I believe the answer is to invest in taxable accounts (i.e. your section “Mutual funds in a standard mutual fund advisor”). Then in years when you want to contribute to the DAF, you can move money from your taxable account to the DAF. Donate shares that have increased in value to the DAF to avoid capital gains taxes, and sell shares that have decreased to tax-loss harvest and then contribute the cash to the DAF. In fact, some people may wish to consider starting off investing in taxable accounts and waiting to open a DAF at a later time.
The section “Mutual funds in a standard mutual fund advisor” discusses capital gains tax, but this should not usually be an issue since you can donate appreciated shares to charity or a DAF. Instead, the taxes to look at are from dividends. These are taxed at the capital gains rate that you cite, and are additionally taxed as ordinary income in most states.
Thanks, this was useful! A few comments:
There was some more discussion on this topic in the following question: https://forum.effectivealtruism.org/posts/iyPQ9fSBGrweXAMLL/investing-to-give-beginner-advice
You write that money should be added to DAFs in years when your marginal tax rate is high. What should we do with money earned in other years? I believe the answer is to invest in taxable accounts (i.e. your section “Mutual funds in a standard mutual fund advisor”). Then in years when you want to contribute to the DAF, you can move money from your taxable account to the DAF. Donate shares that have increased in value to the DAF to avoid capital gains taxes, and sell shares that have decreased to tax-loss harvest and then contribute the cash to the DAF. In fact, some people may wish to consider starting off investing in taxable accounts and waiting to open a DAF at a later time.
The section “Mutual funds in a standard mutual fund advisor” discusses capital gains tax, but this should not usually be an issue since you can donate appreciated shares to charity or a DAF. Instead, the taxes to look at are from dividends. These are taxed at the capital gains rate that you cite, and are additionally taxed as ordinary income in most states.