TD-to-Schwab Tax “Gotcha” Coming in January
Advisors who set up recurring withdrawals at TD (e.g., in Veo One) to occur at the beginning of each month, quarter or year need to beware. With the transition to Schwab, those scheduled January withdrawals will take effect in December instead. In IRAs, this may mean the withdrawal will apply to the wrong tax year (2023 instead of 2024) and will not count toward 2024 RMDs as expected.
Recently, I was working on a “Move Money” operation on the Schwab Advisor Center website, when I noticed something odd about a recurring monthly withdrawal for one of my clients. We had set up a monthly draw from one of her portfolios, and in Veo we had specified that the withdrawal effective date be the first business day of each month. Yet it seemed her “October” withdrawal had an effective transaction date of September 29.
Further sleuth work revealed that multiple other clients’ October withdrawals had effectively occurred in September as well. As it turns out, this oddity was caused by a combination of (1) October 1 falling on a weekend, and (2) a difference between how Schwab Advisor Center (SAC) and TD’s Veo system handle business days in Move Money calculations.
- In TD/Veo, you would specify the “effective date” of a recurring withdrawal (e.g., the first of each month). In the event of weekends or holidays, the system would move the withdrawal to the first subsequent business day (e.g., 10/2/2023), in which case the “completion date” – when the money settles in a client’s bank account – would be the next business day thereafter (e.g., 10/3/2023).
- In SAC, it is the completion date that is anchored in the system, and in the event of a holiday, the effective date moves forward to the first available business day (e.g., 9/29/2023).
Either system is fine in theory. Specifically, TD’s system favored beginning-of-month withdrawals, while Schwab’s system works best for end-of-month withdrawals. The problem arises from transitioning recurring transactions from the former system to the latter.