Interest Income for Uninvested Cash

Interest Income for Uninvested Cash

Can you earn interest income on uninvested cash in your investment account? The answer is yes! Interactive Brokers (IBKR) offers interest on unused money in your account. It is crucial because I have a significant amount of cash most of the time in my IBKR account. Sometimes there are months when I need help saving. So I always keep some money on hand without making a trade. I also stay close to 10% of my portfolio in cash for use in severe downturns. Of course, there is an opportunity cost to keeping money on hand. An interest income option to reduce this opportunity cost would be excellent. Let’s see how much interest income this brokerage house gives.

An investor can earn interest income from IBKR

IBKR pays its clients daily interest for uninvested cash held in their accounts. It is among the highest interest rates for uninvested money among foreign brokerage houses. For February 2023, it currently pays more than 4.5% annual interest on dollar-denominated cash. This interest rate applies if your investment account has net assets greater than $100,000 and your cash holdings are over $10,000. The applicable interest rate decreases proportionally to your asset size if you have less than $100,000 net assets. For example, if you have net assets of $50,000, half of this interest rate applies to the cash in your account. Unfortunately, you cannot earn interest income if you have less than $10,000 in cash. Interest works daily. IBKR updates the interest rate frequently.

Reference interest rate for USD
The reference interest rate for USD

How are benchmark interest rates determined?

IBKR determines reference interest rates through a three-step process. For market interest rates, they rely on short-term foreign exchange swap markets. These values are capped at the top and bottom with traditional interest rate benchmarks (LIBOR, Fed Funds Rate, bank deposit rates, etc.). Standard interest rate benchmarks are used for currencies for which swap markets are unavailable. The figures are announced monthly on the 3rd working day of each month. Those interested in the details can check here.

Does it pay interest on other currencies?

IBKR pays interest on all currencies it accepts for trading. The table below shows all benchmark interest rates valid from the 15th of February, 2023. For instance, the reference interest rate for Turkish Lira is 12.226%. Also, the minimum amount of Turkish Lira cash in your account is 90,000 TL. Finally, IBKR applies negative interest to some currencies. The Japanese Yen and Russian Ruble are these currencies.

The benchmark interest rates for all currencies
The benchmark interest rates for all currencies

What happens when I buy and sell shares?

The exchange happens two days later when you buy shares with cash in your account. It is called the ‘settlement date.’ The money out of your account also occurs on this date. Therefore, you continue to earn interest income for two days after the purchase order is executed. When you sell shares, interest starts to accrue on your cash from the settlement date, as the cash inflow will occur two days later.

For higher amounts

IBKR offers more interest income for the wealthy. If you are a US citizen and have more than $10 million in cash in your investment account, you may participate in the ‘Eligible Contract Participants‘ (ECP) program.

In conclusion

Under certain conditions, earning interest income on cash in your Interactive Brokers account seems possible. However, it yields little due to restrictions. Another alternative would be to hold your cash in money market funds. However, there are other issues, like the transaction costs and the risk of possible capital loss. Another alternative might be investing in Treasury Bills that currently offer up to a 5 percent interest rate. What do you think?

Goodbye, and see you in the following article.

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