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

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)