"free ride" rule & IRA prevents rebalance some/all brokers?

Research
1

EDIT2: The rule discussed within does NOT prevent weekly rebalancing; HOWEVER, some brokers do NOT allow “margin” in IRAs, and in this sense, margin does NOT mean using borrowed money but rather “immediately” using the proceeds from a sale to buy something else (aka “limited margin”).

Thus the point of this thread is therefore “mostly” MOOT (see davidbv below, ~3rd one down, to understand “free ride” rule.)

fyi: “limited margin” in IRAs (according to phone reps/replys here, not actual experience):

OK= IB, ThinkorSwim, Folio, Fidelity, Vanguard
NO= TrdStn (actual experience AND phone rep)

************** ORIGINAL POST BELOW *********

I run a mkt timing model (not here) in my IRA and when I first did it, upon the first switch I discovered the impact of the “free ride” rule under regulation T (? https://www.portfolio123.com/mvnplugin/mvnforum/images/emotion/angry.gif). That is, in a cash acct (all IRAs), you cannot use the proceeds from settlement to purchasse something else until the funds settle. In other words, your model may say sell XYZ and buy ABC “today” BUT you have to wait T+3 days to do the buy.

This rule effectively limits rebalancing unless you use one 50% of your cash: Your first buy uses 50%, then when you rebalance, you’re using the other 50% for your next purchase while waiting for your funds from the sale to settle.

Is EVERYONE here using margin accounts or only partially (~50%) invested?

I thought this rule was universal (as in SEC regs), but is there some way around this in IRAs that allow the rebalancing using proceeds from the sale on the same day for the rebalance buy?

I’m trying to decide between IB and FolioInvesting so those brokers are of particular interest. I also use “TOS” and TrdStn but it seems the commissions would be “costly”, so while I don’t want to turn this into a “brokerage” thread, if you have particular insights on implimenting with these brokers, it would be appreciated. Thx.

Tag: implimentation, impliment,start

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You need to check other brokers. I trade using Fidelity’s Active Trader Pro and they allow fully invested sell and then buy trades in an IRA within seconds of each other (as fast as I can make them) without requiring the sell to fund first. I know that there are other brokers that allow that, but I don’t have any experience with them.

Denny :sunglasses:

3

I have not had an issue with Folio Investing.

Previously, I used Vanguard’s brokerage service and did not normally have any issues, except for once when I entered in the wrong ticker and had to: 1) sell the security that I had just purchased; and 2) buy the correct security. This caused a problem with the free ride rule at Vanguard because I had more unsettled funds from buying and selling in the same day. In other words, I believe that Vanguard normally lets you trade on a receivable, but wants to prevent day trading.

4

I think the rule says you cannot buy a security using unsettled funds and then turn around and sell it Before the funds have settled. So you cannot buy and then sell something in that window while the funds are unsettled. I made that mistake a couple of times. According to the SEC, you get two warnings then the broker starts putting things on hold. I use Vanguard and they have allow instant buys/sells as long as you play by the rules. $7/trade as long as you have another $50k in cash/funds with them.

5

Thanks davidbv… that was exactly my problem so the question should be moot with weekly rebalacning. My “bad” - I had forgotten my problem was a “whipsaw” in my indicator the next day or 2 after my first signal!

6

My experience is this. No problems with Folio Investing. David is right in that there should not be a problem at IB but from previous posts and looking at the IB web site there is a problem at IB unless you have a leveraged account (which you cannot with an IRA).

Hope I’m wrong about that but that is one reason I am at Folio Investing. Let me know if you learn something different.

You may want to look at these posts here

7

(This is also in line with what davidbv described)

With TD Ameritrade, cash from the sale of a stock whose purchase has been settled is immediately available for a purchase, whether its an IRA account or not. You can’t use the funds from an unsettled sale for a purchase. You would have to be approved for and use margin funding or available cash. Margin approval is apparently available for some IRA accounts according to their [b]Margin Disclosure Document[/b] but that’s not something I personally would choose to do. You can also get approval to trade options in an IRA account, which is one way to modify market risk.

Bob

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Yes, IB is a problem if you do no have a margin account. You have to wait until the cash is settled before using it for buys.

I have one non-margin account because IB currently can not open new Australian margin accounts currently.

9

regallow, I came back here via a search for rebalance and noticed your (newer) post. I am with TD Ameritrade and when you say ~“Margin approval… for… IRA… is something I would never do.”, it implies you’re not clear what we’re discussing here. Margin does NOT JUST mean borrowing money to buy stocks. The ONLY margin allowed IN ANY IRA - by IRS rules - is what is usually (?) called “limited margin”, and what this simply means is that if you sell a stock, you can immediately buy something else (the same day). Technically, IMHO, you’re not borrowing money when you do this… you’re simply using the funds in your account to buy another stock, but since the rules give brokers 3 days before they have to provide you with your money - “T+3” - after selling a stock, then it is up to the broker to decide whether you can so this or not. Since the broker can decide - ie, give you “limited margin” - apparently there is no IRS rule against it. This is just a hold over from ~1960s when most people were given paper stock certificates - ergo, it took time to process the paper certificates, and I even think it started out at “T+10”(or 7?). Now everything is done electronically, so even “T+3” is outdated - we’re suppose to be going to “T+1” but it seems to be pushed out.

Ultimately, the point is if you’re trading a model, it is based on selling out some/all stocks that you own and then immediately buying the new stocks according to the model. No waiting for settlement, and again IMHO, you’re not even borrowing money. So if you’re going to trade a model, you SHOULD have “limited margin” if using an IRA to trade it.

10

OldQuant - Thanks for catching a mistake by me. I understood what was being discussed but my second sentence, “You can’t use the funds from an unsettled sale for a purchase” was incorrect as stated and causes the rest of what I posted to sound like gibberish. The second sentence should have read something like:

You can’t use the funds from an unsettled sale for a subsequent purchase and sale until the first sale settles.

From TD Ameritrade’s Account handbook: “Under applicable interpretations issued by the staff of the Board of Governors of the Federal Reserve System, cash account clients are prohibited from making a practice of selling securities prior to making full cash payment for their prior purchase.”

I didn’t mean to equate using unsettled funds as margin. To me, margin only means using funds beyond what is available from cash and unsettled sales. And TD Ameritrade does apparently allow for the possibility of some margin usage in some IRA accounts (but their [color=blue]Margin Disclosure Document[/color] wording is confusing to me in the IRA section). Option spreads might be allowed, but you can’t sell naked options or short stocks.

Sorry for the confusion.
Bob