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A blue Charles Schwab logo shaped like a large puzzle piece is being fitted together with a green TD Ameritrade logo shaped like a puzzle piece

Industry Spotlight > Advisors

3 Critical Tax Tips for TD Advisors, Clients as Schwab Integration Nears

By Jeff Berman

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What You Need to Know

  • The accounts move to the Charles Schwab platform over the Labor Day weekend.
  • The conversion won’t be easy, so advisors need to pay attention to the small details.
  • Advisor Transition Services' Grier Rubeling shares three tax-related tips to help advisors during the transition.

With just a few days to go before TD Ameritrade advisors and their clients’ accounts make the hotly anticipated move to the Charles Schwab platform, Grier Rubeling — founder, owner and operator of consulting firm Advisor Transition Services — highlighted three tax-related tips to help advisors manage the conversion over the Labor Day weekend.

Rubeling posted a total of nine tips about taxes and other issues for TD advisors affected by the conversion via a series of LinkedIn posts based on what she’d read from information that Schwab provided to TD advisors. She then compiled them in a guest post for Kitces.com.

“From the feedback that I have gotten with these tips from advisors —  and I’ve gotten a lot of feedback — people have learned more from these tips than they learned from anything that they got from Schwab just because of the overwhelming nature of the subject matter,” she told ThinkAdvisor in an online interview on Wednesday.

The tips were based on details Rubeling said she read about in about 150 pages of Schwab information. She could have added more tips, but the nine she selected were among the most significant ones, she added.

Tax Tip 1: IRA Contributions and Distributions

During an online interview on Wednesday, Rubeling told ThinkAdvisor: “Any contributions and distributions that were made prior to this weekend, prior to the conversion date, they are not going to [be reflected] on the Schwab system.”

TD clients “will still get a tax document from TD Ameritrade that shows any contributions or distributions that were made for the year 2023, but it’s not as though there’s going to be a consolidated place on the Schwab system that shows what your 2023 contributions and distributions were,” she warned.

She explained: “They will only show any contributions or distributions that were made post-conversion 2023.

“So, if you have monthly contributions coming into retirement accounts or monthly contributions going out of retirement accounts, then … 75% of those are going to be shown on a TD Ameritrade tax document for 2023, and the other 25% of them are going to be shown on a Schwab tax document for 2023, and there’s nowhere in the system that you can go and see them consolidated.”

That means it’s basically a manual process but “nothing’s really going to change,” she said, explaining: “Those recurring contributions and distributions will still be set up at Schwab and still happen. But it’s not like you’re going to be able to go into the system on December 31, 2023 and say, ‘okay, how much money was contributed for the year 2023 to this IRA?”

Advisors will instead “have to pull the report from TD Ameritrade and look at the Schwab system and add the two numbers together,” she added.

The tax documents “will all come from Schwab [and] everything will be reflected on the Schwab system,” she stressed. “However, if you still need historical data, you’ll still need to reference the TD Ameritrade reports for the historical data.”

Therefore, Rubeling suggested “pulling now from TD Ameritrade the reports on any IRA contributions and distributions made in the year 2023 and any previous years.” That is because, “if for some reason you want that information, like sometimes people will pull a 2022 report just to compare 2022 with 2023 to make sure that they’re not missing if somebody contributed to their IRA,” she noted.

Advisors may call clients and ask whether they want to max out their contributions for this year, she pointed out. To do that, however, it is “important to pull that information because you won’t have access to it anymore at Schwab,” she said.

She conceded, however, that it’s “one of those things where it may not affect your business at all if you don’t do recurring contributions or distributions or if you don’t have clients who are making last minute contributions to their IRAs right before tax deadlines.”

“But, if you do, then it could significantly affect it because you could miss a bunch of contributions because you didn’t even realize they didn’t make them yet,” she added.

On Kitces.com, she pointed out: “Manual calculations will need to be done to add the pre-conversion amounts to the post-conversion amounts to get the total amounts. Two tax documents will be issued, one from each institution.”

The “good news” is that TD’s Veo One will remain accessible throughout the year and partially into 2024, so the pre-conversion contribution and distribution amounts will be available to access” that way, she said.

Her conclusion on Kitces.com was: “This conversion is not going to be easy. Not everything is going to transition perfectly from one platform to another. Pay attention to the small details so your normal business operations are not affected more than they need to be.”

Tax Tip 2: Tax Withholding Elections

Before, when TD advisors and their clients filled out the tax withholding document and they wanted to withhold taxes, they “could select either a percentage that you wanted to withhold for federal and state withholding, or you could put in a dollar amount,” she said.

“It’s more common for people to choose percentages just because when you make a distribution, if it’s a different dollar amount, then you want to adjust accordingly with your percentages,” she noted.

However, she told ThinkAdvisor: “Because they gave the clients the ability to put in a dollar amount if they wanted to, some clients did choose to use dollar amounts for their distribution rather than percentages. And I think a lot of the ones that did that really just wanted to see a specific dollar amount come out when their distributions were made instead of a percentage.”

Schwab, however, “does not allow you to select dollar amounts for distribution withholding,” she noted. “So you can only select percentages for federal and state withholding on IRA distributions.”

Also, she explained: “Instead of them calculating the dollar amounts and figuring out what that would be percentagewise, they’re just eliminating those tax withholding selections and entering them as the default for the federal and state elections. So if I go and I am making distributions and I say that I want to withhold $1000 federal and $100 state, all of a sudden now my withholding is going to be whatever the federal and state defaults are.”

Complicating the issue is that each state has its own different minimum defaults, and so “you could be doing a distribution for a client and have a significantly different tax withholding because it switched to a default rather than using what the client had selected to begin with,” she warned.

“That’s a pretty big deal” because “if a client selected a dollar amount, they probably did that for a very, very specific reason, and now they’re not going to get that dollar amount,” she said.

“They’re going to get whatever the default is,” she noted. “So it’s really important to pull a report of anyone that had those dollar amounts selected and to go let the clients know and fix it so that it is now the percentage that they want it to be or let them know what the default percentages are so that they can approve that.”

And, “because there might be recurring distributions happening, it could really mess with people’s taxes if they’re using the default and that’s not something that they expected,” she added.

Many clients “under the age of 70 and a half aren’t really doing regular distributions anyway, but any clients that are over 70 and a half are having to do required minimum distributions,” she pointed out. “So all of those clients that are older than 70 and a half with IRAs are having to do distributions.”

Tax Tip 3: Cost Basis Preference History

Her tip on cost basis covered more than taxes. But she said it “could also significantly affect tax-related items.”

On Kitces.com, she explained: “Those who generally adjust tax-lot defaults are doing so for a specific reason. The fact that those whose personalized preferences are going to reset to FIFO is significant because FIFO is the original default for TD and Schwab.”

But she was quick to add: “It is certainly not always the most tax-efficient method, and those who change it are likely those most concerned about tax efficiency to begin with.”

(Credit: Chris Nicholls, ALM/Adobe Stock)

Jeff Berman

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