Charitable Investment Accounts and How They Work

According to YouGov, most Americans donate to charity in some fashion each year, and for good reason. There are countless worthwhile causes out there that can make the world a better place for a surprisingly small amount of money. There’s also a personal finance benefit: charitable donations offer tax benefits to donors, enabling them to reduce their income tax bill.

The challenge with charity is balancing it with our own financial lives. At a time when most Americans are living paycheck to paycheck, finding money to donate to charity can be challenging. Many companies are aware of this and offer ways in which to simultaneously support charities through use of their product. For example, some insurance providers like Lemonade are charity driven by having a portion of your unclaimed benefits go to charity.

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Even if you choose to directly donate your money, you might be hesitant to give up money that might be used for an emergency fund. Another concern is timing: you might have funds you want to donate right now, but is now the right time to donate? Should you grow your money first and then donate at the right moment?

There are two smart options for charitable investing that balance these concerns of giving up your emergency fund and timing in different ways. 

In this article

    What is a donor-advised fund?

    A donor-advised fund is a type of charity investment account in which all the money in the account is given out to charities of your choice on your timeline, but you get the tax benefit of a charitable donation immediately. 

    Within a donor-advised fund, you can select from a wide range of investment options, as per your preferences. You can aim to maximize your financial returns, or you can choose to invest in ethical companies that are in line with your charitable goals. At any time within that fund, you can sell your investments and donate those proceeds directly to the charity of your choice.

    What is an individual charity account? 

    An individual charity account, on the other hand, is simply an ordinary investment account in which you retain full control over the investments, but the investment gains, the dividends or some other portion of the account is informally earmarked for charity. You remain responsible for taxes on any investment growth within the account, but that would be offset by charitable donations. For example, you could build a donation machine in which the account is fully automated, with dividends automatically paid out to a charity of your choice and any contributions you make automatically invested based on your initial instructions.

    With this approach, you would only get tax deductions based on the amounts you contributed to charity when you contributed them, but you retain full control over the account and could withdraw it for your use in an emergency.

    A similar approach would be to contribute funds to a traditional IRA or Roth IRA each year with the intent of using those funds in retirement as a last resort, but designating that the funds within that IRA be donated to charity after you pass. In this case, you would be able to withdraw the money in that account tax-free in retirement, but you could also donate money within that account — either while you’re alive or after your passing — and also earn a tax deduction for those donations.

    How charitable investment accounts work 

    Both are accounts managed by a large investment firm like Fidelity or Vanguard. In both cases, you contribute funds to those accounts from your checking account (or another after-tax source). Once the money is deposited, you choose how that money is invested with a nearly endless array of options, with ethical considerations if you so choose — for example, you might choose to invest in a company that’s making a product you believe in, like a vaccine manufacturer. You can manage the investments in either type of account to your heart’s content, via investing websites or smartphone investment apps.

    The most significant differences between these two accounts are whether you get a tax deduction and what you can do with the money when you want to make a withdrawal. With a donor-advised fund, you get a tax deduction immediately upon contribution, but the money is effectively already donated — you can then give the money within the account to charities at your time and choosing, but that money must go to charity. 

    With an individual charity account, you retain full control over the money and can even withdraw it for personal use, but you only get tax deductions when money within that account is used for charitable purposes, and you must pay taxes on any investment gains.

    When should you use a donor-advised fund?

    A donor-advised is a great choice if you have a specific significant amount that you want to donate to charity, but you’re not sure how exactly you want to do it yet, or you want to wait for the right moment. Often, donor-advised funds are used in estate planning, where the estate wants to give charitable gifts over an extended period of time.

    This is not a great choice if you are struggling financially and are concerned about having a pool of emergency cash available to you. This is not an option you should consider if you do not already have a reliable emergency fund.

    When should you use an individual charity account?

    On the other hand, having an individual taxable investment account earmarked for charity is a great choice if you can see a future for yourself where you would need the money within the account for personal purposes. You haven’t actually donated that money yet — you’re simply earmarking it for charity, perhaps even going as far as automatically contributing the dividends to a charity — but you’re retaining full control over the account.

    This is not a great choice if you need the immediate tax benefit of a large charitable contribution. With this approach, you’re not actually donating to a charity yet, so you’ve got nothing to deduct. The tax benefits will come later, when you actually donate the funds.

    We welcome your feedback on this article. Contact us at with comments or questions.

    Trent Hamm

    Founder & Columnist

    Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

    Reviewed by

    • Courtney Mihocik
      Courtney Mihocik
      Loans Editor

      Courtney Mihocik is an editor at The Simple Dollar who specializes in personal loans, student loans, auto loans, and debt consolidation loans. She is a former writer and contributing editor to,, and elsewhere.