Schwab System Quirk Could Create RMD Headaches for Former TD Clients

Nathan Dutzmann, the chief investment officer of Roundtable Investment Strategies, was looking into a client’s portfolio recently when he noticed something strange about a recurring monthly withdrawal set up for one of her portfolios.

The account, originally opened on TD Ameritrade’s Veo system, was supposed to take out money on the first of each month. But on Schwab Advisor Services, where all TD accounts moved following the Labor Day conversion, her October withdrawal occurred on Sept. 29.

Dutzmann discovered the same thing happened for several clients that were supposed to receive a recurring withdrawal on Oct. 1. As he wrote on VettaFi’s Advisor Perspectives website, the culprit is a small difference in how systems at TD and Schwab handle weekends and holidays.

This could create headaches at year-end for clients taking required minimum distributions, he said.

“This seems like a really big issue,” Dutzmann told ThinkAdvisor. “Schwab should have noticed this.”

A Schwab spokesperson told ThinkAdvisor in an email that the firm had been listening to advisor feedback and that it was “honoring all advisor elections for retirement account distributions to help ensure that RMDs for the 2023 tax year are processed to meet clients’ year-end deadlines.” Schwab staff were unavailable for further comment.

Effective Dates

At TD, advisors would specify an “effective date” of recurring withdrawals. If this date fell on a weekend or holiday, the system moved it to the subsequent business day, and the money would settle in client accounts on the next business day, the “completion date.” So when Oct.1 occurred on a Sunday, the system moved the effective date to Oct. 2, and the completion date to Oct. 3.

A Fixable Issue

While neither approach is necessarily better than the other, it could create tax headaches and issues with RMDs, Dutzmann explained. If a client is expecting a monthly, quarterly or even annual withdrawal to occur in January and the effective date occurs in December, then it would count as taxable income for 2023 rather than 2024 as intended. And withdrawals would not count toward 2024 RMDs, which could require the client to take out more in the new year than anticipated to meet requirements.

The good news for advisors is that this is fixable. Dutzmann said Schwab’s client service team has been “really good” and provided a workflow for how to identify accounts where there could be an issue and how to fix it, which Dutzmann shared on VettaFi.

While fixing issues will require a lot of manual work, Dutzmann says the overall transition from TD to Schwab has been relatively smooth.

“I’ve written a ton of software, I understand how these things happen,” Dutzmann said. “They came up with a rule set and maybe just fully didnt think through the consequences. I don’t know what the right solution is.”

For now, Dutzmann just wants to spread the word so that RIAs are aware of the issue and won’t be caught with unexpected tax issues at the end of the year.