Buying stock with unsettled funds (Schwab)

Question

I sold stock in my IRA that I have with Schwab. I tried to buy different stock and was given a checkbox to acknowledge that the buy order is being accepted with insufficient (unsettled) funds.

I don't plan on doing anything else with this account. If I accept their terms (check the box), is it implied that they're OK with me purchasing the new stock with the unsettled funds, as long as I don't purchase anything else (go over available funds)?

The confusion is that they're allowing me to do it (it isn't forbidden), but are giving me a scary warning about it. From what I understand it may take 2-3 days for funds to settle.

Answer 1

I use Schwab as well. If you sell, say, $1000 of stock today, you can also buy $1000 worth of stock. No need to wait for settlement.

That you're not planning anything else makes the answer simple. A can of worms can be opened if you are planning additional buy/sells. Which can result in complications.

If you are sticking to the occasional sell, then buy an equal/lesser $$ amount, you're all set.

Answer 2

This is related to 12 CFR § 220.8, also known as Regulation T / Freeriding Rule.

The SEC has made a Bulletin that describes what pattern of trades are allowed.

https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_cashaccounts

Allowed

• Buying and Selling same stock on the same day with settled cash
• Buying a stock with settled cash (needless to say)
• Selling a settled stock and buying another stock on the same day (Your situation)

Not Allowed

• Selling a settled stock and buying another stock on the same day, then selling the "another stock" before the sale of first stock is settled.

Therefore, most brokers (not just Schwab) allow buying and selling same/different stock on the same day in Cash Account, provided that you hold the new stock for a few days afterwards.

The warning message is likely there to implicitly tell you the risk of 90 day mandatory freeze in the event that you sell the new stock too soon.