What Are the Smartest Ways to Give to Charity?

What are the smartest ways to give to charity while also being tax efficient?

Many people want to be generous. But what if the biggest obstacle to giving strategically isn’t a lack of desire – it’s behavior, emotion, and not knowing the right financial tools?

In this episode of Retire in Texas, Darryl Lyons explores the intersection of charitable giving, tax strategy, and behavioral finance. He breaks down three powerful giving tools – donor-advised funds, qualified charitable distributions (QCDs), and donating appreciated stock – and explains how each one can help individuals and retirees give more intentionally and efficiently.

But this conversation goes beyond tax mechanics. Darryl also unpacks the behavioral side of generosity, showing how concepts like the house money effect, mental accounting, and status quo bias can quietly shape the way people think about giving. By understanding both the financial and psychological barriers, listeners can begin to make more thoughtful, impactful charitable decisions.

You’ll learn:

• What a donor-advised fund is and why it has become such a popular charitable giving tool.

• How qualified charitable distributions can help retirees give directly from IRA assets in a tax-efficient way.

• Why donating appreciated stock may be more effective than selling it first and giving cash.

• How behavioral finance influences generosity and charitable decision-making.

• Why education and awareness are often the first steps toward more transformational giving.

Whether you’re still working, already retired, or simply trying to become more intentional with your giving, this episode offers a practical framework for thinking through generosity with long-term perspective.

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Transcript:

Hey, this is Darryl Lyons, CEO and Co-Founder of PAX Financial Group. And you’re listening to Retire in Texas. This information is general in nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. I’ve been traveling a little bit.

My youngest daughter. I have four kids. For those who don’t know, my youngest daughter, had soccer in Austin, San Antonio, Austin, San Antonio, in those back and forth, back and forth. And then my 15-year-old daughter had a volleyball tournament in Houston, which was a lot of fun, actually. And then, my 18-year-old is looking at colleges, so going to Ole Miss and checking out Ole Miss.

So, I’ve been kind of everywhere lately and juggling research and running a company. And of course, my priority is my family. For those that don’t know me. And I’m going to this is my transition thought. And of course, people that know me know that my priority is my faith and my giving reflects that. Could it be better?

Yeah. But I’m proud. I am, I’m proud of my own humility. I know, I’m just, I’m happy that our family gives. We do, we’re givers. It’s part of our framework. And so, I’m going to talk a little bit about that today, but I want to talk about it, if you’re not a giver please listen because there’s tax strategy involved and behavioral finance.

So, I’m actually colliding two themes here. I’m talking about tax strategy when we do giving and then the behavioral inhibitors along the way. Because sometimes despite having knowledge of the tools and the strategy, sometimes the just human behavior prevents us from unlocking just the very strategic generosity. And so, we’ve got to look at it from an economic and behavioral lens, think about how we might hesitate when we give and how to be smarter.

What are the roadblocks? What are just maybe just some of the biases that we have? I believe people, when it comes to money, especially those that have accumulated it. Not always, not always, but I like to come in presupposing some things. Maybe you do. Maybe. You know, I presuppose that people are generally intelligent. People want to be generous.

Maybe those are wrong, but I like to presuppose those things. And where I think that I also presuppose, is that people are generally unaware of the tools. So, then that’s incumbent upon me to be an educator. And then I also presuppose that we have these biases and our ability to give is limited by our ability to think and work through these biases.

And these biases are often rooted in the academic study of behavioral finance, which is a collision of neuroscience, psychology, and traditional finance. So, these three different themes neuroscience, psychology, and traditional finance are colliding and have been for years. And defining how economists, politicians, and even financial advisors can lead people better. Because it’s not always about math.

It’s about behavior. I really have been studying this. For those that know me, studying this, nerding out over it for years. But the part, this podcast, when I first started, I interviewed probably 50 retirees every week for a year. So 52, 54, whatever that number is. What was interesting, if you go back and listen to those, is that every single one made very, very important decisions that worked out for them because they were all generally successful people in some capacity.

But those decisions often were rooted not in a Ben Franklin academic, you know, paper exercise thing, nor was it worked in like, research, but rather their decisions were rooted. And if you listen to these podcasts, you’ll see they were rooted in how they were raised as children. Like, think about that. How much of our money decisions are just simply a byproduct of how we were taught or not taught about money as children?

I mean, it’s crazy to think about the decisions that we make about money are just a byproduct of just how we were raised with money, or I’d say, or it’s probably and the money decisions that we make are often influenced by heuristics, rules of thumb or marketing. Yes, all of those things are true. And then we wake up and we realize that maybe we don’t control the narrative as much as we thought.

So that’s where I come in to try to help move the needle for you guys and think about these things. So, let’s, that’s the area of behavioral finance. And I’m going to have it, I’m going to have this area behavioral finance have a conversation with giving tools. So that’s the two things that are going to be on the agenda today.

So, I’m going to talk about three giving tools. And I’m going to explain these to you so you can understand them and see if they’re good for you. One is the donor advised funds. So, donor advised funds. This is a fund. It’s very important for you to understand a fund that you can put money into, get immediate tax deduction, but give the money to the charities later down the road whenever you’re ready, whenever you find the charity, whenever you’re comfortable with charity, whenever you’ve done your research, you can figure that out down the road, but you get a chance to put money in immediately in that tax year to get that deduction.

It is the fastest growing charitable vehicle in America now that the deductibility is subject to and in fact, all of these tax conversations are subject to your accountant and CPA. Looking at your unique situation. But the donor advised fund is amazing. I have one personally, I love it. I love the convenience of it and obviously love the tax deduction, but also your ability to time okay, when I get the tax deduction versus when I give to the charity that control mechanism is attractive.

So how does this, how does this relate to behavioral finance. Well, there’s this thing called the house money effect. The house money effect was introduced by Richard Thaler, one of my favorite authors of all time who wrote Thinking Fast and Slow but he also wrote a paper in 1990 called Gambling with the House Money and Trying to Break Even, the Effects of Prior Outcomes on Risky Choice.

He did win a Nobel Prize in Economics. I love Richard Thaler. Much of his research was rooted in man’s search for meaning Viktor Frankl and if you know Viktor Frankl, much of his research was rooted in the Word of God. So, it all comes back to truth. That’s just my little exit ramp for you today.

But this idea of house money effect. When gamblers win money, there’s, I’m stating the obvious, but let me let me state it. When gamblers win with money that they are often willing to risk the winnings. It’s the casino’s money. It’s not their own. And people totally treat money differently when it’s not their own. They treat tax refunds differently.

We know this. The stock market actually plans on it. I watch the stock market every day and it’s like, well, if tax refunds are looking good this year for, you know, consumers are going to spend it on TVs. You know, it is a predictable thing. People, when they get funds, treat it in a windfall type of way. They treat it less conservatively. So, here’s how this plays out with donor advised funds.

When somebody has money to give to a charity, let’s say it’s $10,000 or $100, I’ll use $100,000 and it’s in their account. It’s just hard to give it away. It’s not house money. It’s like a weird thing. It’s like you have a lot of money in your account. I don’t want to give it to that nonprofit. I hate to relinquish because, you know what? But when the money goes directly into donor advised fund.

It’s real weird. It’s easier to give that money away. It’s now house money. I know it’s kind of strange, but it is so stinking true. It’s just a complete mindset shift. And so moving money to a donor advised fund makes it easier for all of us to give.

So, going back to what the construction of a donor advised fund is, you know how when somebody wants a tax deduction in a given year but aren’t just they just not 100% certain what charity to give it to? That’s a donor advised fund. Donor advised funds. People are, let me say it this way. Donors who have donor advised funds, they give more frequently and they give larger grants to charities.

Why? Because they’ve already crossed this psychological hurdle and they’re giving away house money. Pretty interesting, right? Okay. Let’s go to second financial tool. Remember I got three financial tools. The first one is donor advised funds. The second one is qualified charitable distribution. This is for people who are retired. If you’re taking required minimum distributions, RMDs – required minimum distributions.

You have to take it at certain ages. Out of traditional IRAs, not Roth IRAs, out of traditional IRAs. So, you’ve, you know, you’ve put together a portfolio of investments over the years and your 401(k), now the government says you got to start taking money out, and we’re going to tax that money. So, required minimum distributions.

I probably need to do a whole podcast on that. But anyways, what’s cool about qualified charitable distributions, this is relatively new is instead of, instead of taking the money as required minimum distribution and let’s say it’s $5,000 and you take $5,000 out because the government tells you pay taxes on it, then you net 4000, and then you give that to the church.

I’ll say the church. There’s a more efficient way to do that. It’s called a qualified charitable distribution. And you just instead of paying taxes on that money, you just send the 5000 directly to the church.

You follow me. Okay, very cool thing. But there’s this other thing at play called mental accounting. And I want to share this. This is another behavioral finance thing. Mental accounting. And it happens this way. So, for example, I might say talk to somebody who’s thinking about their budget in retirement. They’re like, okay, I still do my giving in retirement, but it comes out of my, every and people used to write checks, not write a lot, but now it’s just drafted, you know, it comes out of my budget and I give $1,000 a month in retirement, let’s say 500, whatever, $500 a month in retirement.

And I tell them, look, I know you have $500 a month for retirement, but why don’t we do this? Why don’t we give your required minimum distribution to charity? And then instead of giving to the church out of your budget, you know, you don’t have to anymore. You don’t have to do that anymore because you’ve already accounted for it. In your RMD and I’ve had people go, oh, that’s great.

That’s perfect. So, it’s much more tax efficient. I won’t give for my budget in retirement. I’ll just give for my RMD much more tax efficiently, same amount of money. So, here’s where mental accounting becomes interesting. People still give out of their budget. People still give out of their budget.

Now it’s a weird thing, but people then start to say, well, I feel like I still want to give. And I know that this tax accounting shift occurred for me, but this mental accounting shift did not occur for me. So, I still feel compelled to give out of my budget. And as long as your financial advisor gives you the green light, then go for it.

But once the tax accounting shift takes place, then this, most retirees have to reconcile this mental accounting which says, do I still give out of my budget, even though I’ve decided to do it through my RMD? It’s an interesting thing, and I think it’s worth unpacking in, as long as, like I said, as long as your financial advisor, the reason I say that I want to make sure I caveat this well, because I’ve had work with widows who were very generous and tell them to slow down giving.

So having a financial advisor, working with the widow and making sure that giving is within reason, I think is an important caveat here. But suppose that you give your RMD directly to the charity through the qualified charitable distribution, and then you’re so inclined to continue to give through your budgeting and it doesn’t impact your personal lifestyle long term, then go for it.

So that tax accounting change took place and ultimately then a mental accounting hurdle had to take place. And it’s an interesting experience to walk through with people. Okay. The last one appreciated stock. So, I’ve only have a few minutes here but appreciated stock. This is the last financial tool, when it comes to giving you, I’m going to show you how behavioral finance collides with this one.

Appreciated stock means like somebody let me give you an example. Somebody bought Apple at $10,000. They pay $10,000 for Apple a few years ago. Now it’s worth 50,000, and they don’t need it anymore. What a good place. What a good place. Like what a good thing. They don’t need anymore. So, some might say, well, I’m going to sell the stock, I’m going to sell Apple, and then I’m going to give the money to charity.

So, they sell Apple, they pay taxes on it, and then they give the net amount to charity. So, in this example 50,000, maybe they pay 8000 taxes. Then they give $42,000 to charity. That’s not the most efficient way to do it. Most efficient way to do it is just taking the whole 50,000 and give it to charity.

A gifted, appreciated stock and then the charity sells it because they’re non-profit. That’s much more efficient. The only person that loses in that situation is Uncle Sam. The IRS, much more efficient to just donate the stock directly to the charity. But why doesn’t this happen all the time? Do you just think that it’s like easy to like easy?

And it has to do with status quo bias. Just little again a little. Another behavioral finance thing. Status quo bias means I just don’t want to think about it because I just, I’m comfortable. I’m good. I don’t want to mess with it. It’s inertia. I’ve got some habits. It just seems complex. But frankly, my approach is, I think it’s just maybe a lack of awareness that this is a very effective way to be able to bless nonprofits and give money to charities in an efficient way.

So, if you have any appreciated stock and in San Antonio, that’s where I’m at. San Antonio doesn’t have a lot of publicly traded companies. Valero and AT&T used to have their headquarters here, and we used to see a lot of people who owned stock at a low price and ultimately appreciated it to a point where those decisions had to be made.

But I will tell you, this is a decision that has to happen a lot in Austin and in Dallas, for that matter. Oracle and these big companies, even Dell, the big tech companies who have seen their stock appreciate over the years. I think it’s incumbent upon you to attack the status quo bias of continuing to let that ride versus the value of giving it to charity.

And so, the challenge is it is not the tax efficiency. It’s just being willing to be uncomfortable attacking the status quo. So, I just want to challenge those that may have investments that have done particular really well and they have appreciated and they give to charity. And if they could just ask themselves maybe this year, maybe next year, it’s just much more efficient for me to give this whole little chunk of stock to the nonprofit.

They sell it. They are 501C3 not subject to the same taxes that we are. And it’s much more efficient. So those are three financial vehicles that are very important for you to know about donor advised funds, qualified charitable distributions and, appreciated stock. And the behavioral finance challenge that encompasses all of them. And so, I think we have to work through all of us to just identify these emotional attachments.

And it just starts with education because these tools are charitably planning. Yes. They’re financial. Yes, they are math. But the behavior is really the barrier. And I think the difference between like maybe a good gift and, you know, sprinkling of some gifts and like transformational gifts is just simply identifying smarter ways to give. And so that’s the challenge that you have today.

So, unpack these three in the context of your personal financial situation, how it impacts you long term. And then of course, discuss it with your CPA. And as always, you think different when you think long term. Have a great day.

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