7 Things to Know About T+1 Settlement

March 8, 2024
In May 2024, settlement cycles on stock trades and other securities move from two days to one. Will that affect your portfolio? Here are seven things to know.

For many investors, making a trade feels like an instant process. But there are actually two important dates involved in any trade that investors should know and understand—and one of them is about to make an important change. 

The transaction date is the day you successfully execute a trade. The settlement date is when that trade becomes official. It's the date when payment is due for purchases, when securities sold must be delivered, and the security's transfer agent has verified the new shareholder and removed the former one. 

On May 28, 2024, settlement cycles on any U.S. securities trade will change from two business days to one. For most investors, this event may have little or no impact. But for some, the time it takes to settle a trade can significantly influence portfolio and trading decisions (more below). 

Known officially as T+1 (trading day plus one business day), this transition will put trade settlement for stocks, bonds, and related assets on the same one-day timetable. Two-day securities settlement—currently known as T+2—has been the standard since 2017 when the Securities and Exchange Commission (SEC) amended its rules to shorten settlement from three days. 

How will T+1 affect you and your investments? Here are a few key things to know:

  1. What's driving shorter settlement cycles? Faster technology and investor preference, mainly. 
  2. What does T+1 mean for most investors? Generally, very little because many brokerage firms today including Schwab—require cash or adequate margin prior to entering any securities orders in a client's account for efficient settlement. And unlike decades ago, investors typically hold their securities in their accounts electronically, so relatively few people have to rush paper certificates to their brokerage offices by the settlement deadline. However, it's worth noting that for some investors, faster securities settlement could influence future trading, portfolio, and tax strategies (see below).
  3. Which securities will be affected by T+1? According to the Financial Industry Regulatory Authority (FINRA), stocks, bonds, exchange-traded funds (ETFs), certain mutual funds, municipal securities, Real Estate Investment Trusts (REITs), and master-limited partnerships (MLPs) traded on U.S. exchanges will move from T+2 to T+1 as of May 28. 
  4. What about government bonds? Government bonds settlement is already set at T+1.
  5. How will T+1 settlement actually work? For example, let's say you execute a securities trade on Monday. After May 28, 2024, that transaction must be settled on the next business day, which would be Tuesday if the markets are open. If you were to successfully trade on a Friday, your settlement date would be the following Monday—as long as it isn't market holiday. Note: Mexico and Canada are also moving to T+1 settlement on May 27—U.S. markets reopen on May 28 that week because of the Memorial Day holiday. 
  6. How could T+1 influence certain investment decisions? Some investors will want to make sure they own shares by specific dates to participate in proxy votes or annual meetings. In these cases, shorter settlement cycles can help the investor.
  7. Are there potential tax issues? Because of T+1, you'll have half the time to correct any cost basis decisions you made in a trade. Once settlement is complete, your cost basis—your total initial investment, any commissions or fees paid, and decisions on how you'll collect dividends and distributions—is set for tax purposes. After T+1 goes into effect, any cost basis adjustments will have to be made within one business day of the trade, not two. 

Bottom line

On May 28, 2024, T+1 arrives for U.S. investors, trimming the settlement cycles for securities trades from two days to one. For some investors, one-day settlement cycles may mean greater convenience. For others, T+1 may require closer attention to how shorter settlement times could affect one's investment, trading, or tax decisions. To learn more about how this transition could affect your individual situation, consider reaching out to a qualified advisor.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. 

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. 

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

Options carry a high level  of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the Options Disclosure Document titled "Characteristics and Risks of Standardized Options" before considering any option transaction. Supporting documentation for any claims or statistical information is available upon request.

Schwab does not provide tax advice. Clients should consult a professional tax advisor for their tax advice needs.

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