Last updated on: May 20, 2025
Navigating the financial landscape of a nonprofit can feel like learning a new language, especially when it comes to understanding restricted funds and donor-advised funds (DAFs). When considering restricted funs vs donor-advised funds for nonprofits, it’s important to note that while both involve designated uses for charitable dollars, they serve very different purposes and are managed in different ways. This makes understanding restricted funs vs donor-advised funds for nonprofits crucial for effective financial management.
In this article, we’ll explore the key differences between restricted funds and donor-advised funds, when each is used, and how nonprofits should manage them to stay compliant and financially sound. Knowing the difference in restricted funs vs donor-advised funds for nonprofits can greatly aid in making informed decisions.
What Are Restricted Funds?
Restricted funds are contributions given to a nonprofit with specific limitations on how the money can be spent. These limitations are determined by the donor at the time of the gift.
Examples of restricted funds:
- A $10,000 donation specified to be used only for building a community food pantry.
- A grant that must be used to fund STEM programs for girls in middle school.
- A memorial fund created to support veteran outreach services.
There are two types of restricted funds:
- Temporarily Restricted: Funds that are restricted for a certain period or project.
- Permanently Restricted: Funds that must be maintained in perpetuity (e.g., an endowment), though the interest earned may be used.
Properly tracking and managing these funds is critical, not only for honoring donor intent but also for staying compliant with IRS regulations and nonprofit accounting standards. A comprehensive understanding of restricted funs vs donor-advised funds for nonprofits aids in compliance.
What Are Donor-Advised Funds (DAFs)?
Donor-Advised Funds are charitable giving accounts usually held by a public charity, foundation, or financial institution (e.g., Fidelity Charitable, Schwab Charitable). A donor contributes to a DAF and receives an immediate tax deduction, then recommends grants to nonprofits over time.
Key characteristics of DAFs:
- Control remains with the fund sponsor, not the nonprofit.
- Donors can suggest where funds go, but the DAF sponsor has the final say.
- Grants from DAFs are not guaranteed and may come with limited information about donor intent.
For nonprofits, receiving a gift from a DAF may feel similar to other donations, but there’s no ongoing restriction unless specified. However, transparency and documentation are still key for proper accounting and donor stewardship.
Major Differences at a Glance
| Feature | Restricted Funds | Donor-Advised Funds |
| Who controls the funds? | The nonprofit (under donor’s restrictions) | The DAF sponsor organization |
| Restrictions? | Yes, per donor instructions | Possibly, but not always |
| Who donates? | Individual or organization directly to nonprofit | Individual donates to DAF, which then grants to nonprofit |
| Use of funds | Must align with the donor’s stated purpose | Usually unrestricted unless specified |
| Reporting needs | Detailed tracking for compliance and audits | Standard donation acknowledgment and tracking |
Why This Matters for Nonprofit Leaders
Misunderstanding the difference between restricted funds and DAFs can lead to mismanagement, noncompliance, and even loss of donor trust. Your nonprofit must have clear policies and systems in place to:
- Accurately track and report on restricted funds
- Properly acknowledge DAF contributions
- Communicate clearly with donors about how their gifts are used
Need Help Managing Restricted Funds or Donor Contributions?
At BryteBridge, we help new and growing nonprofits understand and manage their financial responsibilities—from restricted fund tracking to strategic fundraising support. Our expert consultants simplify compliance and accounting so you can focus on your mission.
For more information, join BryteBridge Connect Membership for Live Bootcamps, Webinars, and classes. Speak to a BryteBridge Consultant today by calling 877-857-9002.
