Collecting interest on not yet settled transactions

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tcrez
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Collecting interest on not yet settled transactions

Post by tcrez »

I rolled money from my 401k into a IRA. The money arrived in money market funds. I immediately bought index funds (i.e VTI) with it. It looks like the assets were sold in the 401k at the end of day N, moved to the IRA on day N+1, transactions were possible in IRA on the beginning of day N+2 (the day I bought VTI) and then settled on day N+6.

Through all all it seems I collected 5 days of interest on my funds at 5.29%. So it seems I earned interest on my transactions not yet settled?

Wouldn't that open up the possibility of interest interest twice, especially if you bought say SGOV?
fullham
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Re: Collecting interest on not yet settled transactions

Post by fullham »

Yes you earn interest on cash for unsettled buys. And it works the other way if you were to sell, you would not earn interest on the cash before settlement. I don't know what you mean by earning interest twice with SGOV.
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tcrez
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Re: Collecting interest on not yet settled transactions

Post by tcrez »

You earn capital gain or dividends on SGOV the moment the order you placed goes through. The transaction settles a few days later and during that time your cash also earns interest.
rkhusky
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Re: Collecting interest on not yet settled transactions

Post by rkhusky »

Bond interest and dividends are essentially the same thing. On a bond fund you can get capital gains or losses if the price changes, but that doesn’t happen for MM funds (or it’s not supposed to).
alex_686
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Re: Collecting interest on not yet settled transactions

Post by alex_686 »

tcrez wrote: Wed May 15, 2024 11:22 am You earn capital gain or dividends on SGOV the moment the order you placed goes through. The transaction settles a few days later and during that time your cash also earns interest.
You start earning interest on the date SGOV settles.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Lyrrad
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Re: Collecting interest on not yet settled transactions

Post by Lyrrad »

tcrez wrote: Wed May 15, 2024 11:22 am You earn capital gain or dividends on SGOV the moment the order you placed goes through. The transaction settles a few days later and during that time your cash also earns interest.
I believe that SGOV tends to have its market value increase more on Thursdays, reflecting the two extra days for a purchase transaction to settle over the weekend. Once T+1 settlement goes into effect later this month, I'd the market value increase to happen on Fridays. I'd also expect the average market premium over NAV to noticeably decrease.
Rocky Mtn Man
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Re: Collecting interest on not yet settled transactions

Post by Rocky Mtn Man »

tcrez wrote: Wed May 15, 2024 9:23 am

Wouldn't that open up the possibility of interest interest twice, especially if you bought say SGOV?
Yes, you will get the market price of the day you bought it and then money leaves your settlement fund at T+2. However, when you sell, the opposite will happen, you will get the sell price and then start earning interest in your money market at T+2. Meanwhile SGOV share price went up 2-3 cents.

Of note, the market will adopt a T+1 settlement scheme later this month.

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Topic Author
tcrez
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Re: Collecting interest on not yet settled transactions

Post by tcrez »

alex_686 wrote: Wed May 15, 2024 12:27 pm
tcrez wrote: Wed May 15, 2024 11:22 am You earn capital gain or dividends on SGOV the moment the order you placed goes through. The transaction settles a few days later and during that time your cash also earns interest.
You start earning interest on the date SGOV settles.

SGOV’s price increases daily by a small amount unless a dividend goes out. So you lock in the low price on the day the order goes through, then on the day the transaction settles the price is higher.
avburns
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Re: Collecting interest on not yet settled transactions

Post by avburns »

tcrez wrote: Wed May 15, 2024 9:23 am I rolled money from my 401k into a IRA. The money arrived in money market funds. I immediately bought index funds (i.e VTI) with it. It looks like the assets were sold in the 401k at the end of day N, moved to the IRA on day N+1, transactions were possible in IRA on the beginning of day N+2 (the day I bought VTI) and then settled on day N+6.

Through all all it seems I collected 5 days of interest on my funds at 5.29%. So it seems I earned interest on my transactions not yet settled?

Wouldn't that open up the possibility of interest interest twice, especially if you bought say SGOV?
This situation could potentially lead to earning interest on your transactions before they are settled, resulting in what seems like double interest. However, it's essential to note that this is not typical and may be specific to the timing and processes involved in your rollover and investment transactions.
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