What to Know About T Plus 1 Trade Settlement
On May 28, 2024, settlement cycles on U.S. stocks and other securities will shift from two business days to one. For most investors, this shift will have little or no impact. But it will affect some investors and certain types of transactions. It may be helpful to understand the basics of this important change.
T+1 vs. T+2
The trade date (T) is the day your order to buy or sell a security is executed. The settlement date is the day your order is finalized, and when the funds used to purchase the security and any sold securities must be delivered. Put simply, T+1 means most transactions will settle on the next business day after the trade.
For example, under the current T+2 protocol, if you sell shares of a stock on a Monday, the transaction would settle in two business days on Wednesday. Beginning on May 28, 2024, if you sell shares of a stock on a Monday, the transaction would settle in one business day on Tuesday.
Who will T+1 affect?
T+1 settlement will have little or no impact on most investors. This is because most brokerage firms require cash or sufficient margin before an investor can place a purchase order.
However, some brokerage firms allow purchases without enough funds in the account. Under T+1, investors in this situation must act faster. They will need to deliver a check or initiate a funds transfer. The funds must be deposited into the brokerage account by the next business day.
Another possible effect of T+1 is a tighter deadline for delivering paper certificates when securities are sold. This situation is uncommon today. Most investors hold securities electronically, and electronic transfers are not affected by the shorter settlement period.
If you plan to sell a security held as a paper certificate, you must be prepared. The certificate must be delivered to the brokerage firm no later than the next business day after the trade is executed.
Securities affected by T+1 include stocks, bonds, exchange-traded funds, certain mutual funds, municipal securities, real estate investment trusts, and master limited partnerships traded on U.S. exchanges.
Government bonds and options are not affected. Their settlement period is already set at T+1.
Establishing accurate cost basis
When selling a security, any capital gains taxes are calculated using the security’s cost basis, which is the initial amount invested plus any commissions or fees and reinvested dividends and distributions. Under most circumstances, the change to T+1 will have no effect on figuring cost basis. However, if you purchased a security through more than one brokerage firm, you would have one less day to provide information on the previous purchase(s) to your current firm. Once settlement is complete, your cost basis is established for tax purposes. The best practice is to make sure your current brokerage has full cost-basis information on any securities purchased at previous brokerages.
For more information, see IRS Publication 550, which offers detailed guidance on how to calculate cost basis under different circumstances.
Convenience and close attention
For some investors, one-day settlement may mean greater convenience. In effect, an investor will fully own a security one day sooner than under the current system. This could be helpful for an investor who wants to trade the security quickly or wants to participate in a proxy vote. However, T+1 will also require some investors to pay closer attention to how the shorter settlement time could affect investment, trading, or tax decisions.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
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