Interactive Brokers Lite

Introduction

Interactive Brokers (ticker symbol IBKR) is the one of the largest brokerage firms in the world with substantial financial backing, advanced technology and the preferred choice of professional traders / small hedge funds / family offices. While there are many excellent brokerage accounts available to US customers (Robinhood, Fidelity, Ameritrade, E*Trade etc.), Interactive Brokers is particularly attractive to people who need to deal with multiple tax residencies, moving between countries and potentially receiving salaries or payments from oversea.

Interactive Brokers offers two main accounts to US customers, namely Interactive Brokers Pro (IBKR Pro) for advanced traders and Interactive Brokers Lite (IBKR Lite) for regular customers. For most international customers, IBKR Lite (as discussed here) is the best choice, but we also compare both types of accounts here.

Advantages of Interactive Brokers Lite

IBKR Lite comes with zero monthly fees, free US market data and zero commission for trading on US exchanges. While this alone would not qualify IBKR Lite as the best choice, as this is offered by many competitors, the true advantage is that IBKR Lite still comes with most of the special benefits of the professional account:

• Easy change of tax residency, when moving abroad (without the risk of getting your account closed).

• If you move longterm abroad and break all ties with the US, you can often keep your account or just transfer it to an IBKR Pro account in the new jurisdiction (zero fees, no hassle with international transfers).

• You get almost free international money transfers (cheaper than TransferWise/Wise etc.)! You can deposit and withdraw cash in most major currencies and exchange currency for 2 USD at the official exchange rate (no markups etc.) without additional bank transfer fees (as local transfers are free in most countries, such as US, UK, Australia, EUR zone etc.). This is cheaper than essentially all transfer services (including TransferWise/Wise, CurrencyFair etc.) and provides additional flexibility, as you can easily access your funds from abroad or deposit a part of your foreign salary directly to invest for retirement. You can read more about this here.

• You have easy and cheap access to foreign stock exchanges, so if you temporarily live in another country or would like to directly invest in foreign stocks, you can do this with IBKR Lite (though there are some low trading fees).

• Special advantages for US permanent residents / citizens living abroad: If you are a US person, you need to declare your worldwide income for US taxes and even declare financial information about your foreign accounts (FBAR). Moreover, you are subject to penalty taxes if you invest in a Passive Foreign Investment Company (PFIC), which includes foreign ETFs and mutual funds. Consequently, if you are a US permanent resident or citizen, you should not invest in foreign ETFs, but stick to US products (subtlety: some foreign countries may have themselves some penalty tax on foreign investment products, such that US persons living there find themselves in a real dilemma). IBKR Lite allows such people to invest in US ETFs, while living in another country and having two tax residencies.

• You can easily upgrade to IBKR Pro in the future if you ever decided that you want to use more professional trading tools.

• You have full access to Interactive Broker's margins if you ever decided to trade on margin (only recommended for people who know what they are doing). Note, however, that IBKR Lite has higher margin rates than IBKR Pro (see here). You should not trade on margin unless you know exactly what you are doing and are aware of the risks. For most people, a cash account (no margin!) is the better choice!

• You can easily transfer assets internationally, because Interactive Brokers has ties with most foreign exchanges. If you inherit or receive otherwise foreign stocks or stock options, you will often be able to transfer them to Interactive Brokers without fees (or low fees), without needing to deal with large number of intermediate banks / institutions and without being required to sell (potentially leading to high tax obligations at suboptimal times). This also applies to situations of a foreign inheritance that you want to invest.

• There is currently a promotion*, where you can receive up to 1000 USD for opening a new account with Interactive Brokers. See further details and discussions below (terms and conditions can be found in the link).

Regarding the opening bonus

Currently, Interactive Brokers runs a promotion* where you receive a bonus equal to 1% of the money that you deposit / stocks that you transfer and keep for one year (maximal bonus is 1000 USD). Please read the terms & conditions (see link) carefully: The bonus is paid out in the form of "award shares" of IBKR, i.e., you receive Interactive Brokers stock. If you withdraw money within the first year, the award shares are reduced. Most importantly, you cannot sell these shares for one year after you received them. In summary, you essentially get a bonus of 1% of the amount that you deposit (up to 1000 USD) as ownership of IBKR stock.

While this may seem cumbersome or complicated at first, it is really just another bonus similar to the one offered by many other firms (such as Chase, Robinhood, WeBull etc.). Interactive Brokers does this to increase its market share among retail investors, as it tries to expand beyond professional traders. There are no hidden fees or a requirement to invest your deposited money in a certain way. It is best to look at it as an additional "nice to have", while not making your decisions based on it!

This bonus is very attractive if you intend to manage your retirement / stock investments with Interactive Brokers. You can transfer your stocks/ETFs/assets from many countries with little to no fees. You can also deposit money in most major currencies (see above) without additional fees. The main advantages of IBKR for expats were already discussed above, namely that it is easy to deposit from different countries (depending on where you currently work / make money), but you can also withdraw money when needed without needing additional transfer services (and with almost zero exchange fees).

If you only intend to use Interactive Brokers to exchange and transfer money internationally, you will probably not benefit from this bonus, as you would likely not leave the required amount in assets and/or currency in the account for one year. You may still benefit from the bonus, in case you keep some funds in the account for later currency conversion or as emergency funds (which can be easily accessed from different countries).

Potential disadvantages

Most of the disadvantages of the IBKR Pro account mentioned here do not apply to IBKR Lite. However, there are still things you should be aware of:

• The app is not as intuitive as Robinhood and some other accounts. This is something to live with, which might improve in the future. On the flip side, you do have access to some more advanced tools.

• Some countries (such as Germany) have a direct tax that is directly implemented by their banks / brokerage firms. As Interactive Brokers does not participate in such automatic taxation, you will need to declare your taxes yourself. For example, in Germany everybody with foreign brokerage accounts is required to file a tax return. However, for most people moving internationally it will be less hassle to deal with German taxes (while living there) than to repeatedly open and close brokerage accounts to always have only accounts in the current country of residence.

Address requirement for opening an account

Interactive Brokers Lite is only offered to US customers. Therefore, you can only choose Interactive Brokers Lite if you open your account with a "permanent address" in the US. This address is verified in the following way:

• If you have a US credit file (see more details here), Interactive Brokers will match your name to the address on your credit file which completely suffices as verification. You might still need to prove your identity by providing a copy of your passport, but the address part is directly accepted.

• If the address verification based on your credit file fails (for example, because you do not have a US credit file), you will need to prove your address by providing some official document, such as bank statements, utility bills etc.

People living abroad can still open a IBKR Lite account if they have a US reference address, which they can prove in the opening process. The typical scenario is to own real estate in the US, such as summer house, vacation home or similar, which serves as a permanent long term address. However, people are also successful in opening an IBKR Lite account by providing the address of their parents, relatives or even friends as permanent address. It is easy to provide proof of such an address, because most US banks allow easily to change the address on file, which will then appear on the bank statement that serves as proof of address when opening the account.

Special situation for Individual Retirement Accounts (IRA)

While IBKR Lite accounts are not offered for people with a non-US address on file, it appears that in the case of an Individual Retirement Account (IRA), it is possible to change the address on file to a foreign address without being required to move/close the account. This is likely related to the fact that IRAs are US-specific products and specifically intended for US customers. Note, however, that such policies may change in the future, so even for an IRA account it might be wise to keep a US address on file, provided that you have a permanent US address, while you are abroad.

Low risk of account closure

If you only live in the US, there is no risk of getting your account closed, but even when you live temporarily abroad Interactive Brokers will usually allow you to continue to use the account.

Opening an investment account as expat is always a bit difficult, as banks and brokerage firms regularly changes their rules and evaluate their risk. Many US brokerage firms (such as Charles Schwab, Fidelity etc.) are known for suddenly closing the account of US permanent residents or citizens who currently live abroad, as soon as the firm becomes aware that the respective individual is not fully based in the US. Interactive Brokers is known to be much more relaxed and typically allows customers to keep their US based account, even if they move temporarily or longer term abroad (as long as they can keep a US reference address on file). Moreover, even if Interactive Brokers would restrict IBKR Lite accounts for such customers, it will be easy to just convert the account to an IBKR Pro account of another jurisdiction, i.e., technically the customer would open an IBKR Pro account in the country of their current residence (EU, UK, Australia etc.) and then transfer the assets across. While this may mean that some of the IBKR Lite benefits may be lost, it is much less dramatic than if the account would be directly liquidated and closed (potentially with dramatic tax implications).

Tax residency

A key advantage of Interactive Brokers is that it is made for people who may have complicated tax situations. While most US brokerage firms (such as Robinhood etc.) will just refuse to deal with customers who are tax residents of several countries, Interactive Brokers allows customers to transparently declare their individual situation and even take advantage of tax treaties. In particular, your tax residency is treated independently from your reference address, when opening the account.

For example, a US customer who temporarily lives outside of the US, but is not a US person anymore (i.e., somebody who is neither US permanent resident / citizen) can declare that they are only a tax resident in a foreign country. The same applies for foreign nationals who work for international or foreign institutions (UN, World Bank, foreign diplomatic services), as they may not be residents for tax purposes despite living in the US.

Moreover, customers can take full advantage of tax treaties. For example, a German customer who opened their Interactive Brokers Lite account, while studying/working in the US and who still have a US reference address (owned real estate, relatives etc.), can move back to Germany and declare that they are now only tax resident of Germany, where they can take advantage of the US-German tax treaty with a reduced US tax on US dividends of only 15%. Most other US brokerage firms would not allow this and either tax at 30% or not tax at all, which would imply that the customer needed to file US taxes to pay the correct amount (or otherwise committed tax evasion).

How to update your tax information in IBKR

It is easy to provide provide up-to-date tax information to Interactive Brokers. For this, you should follow these steps:

1. Login to your account.

2. Go to Settings -> Account Settings. You can also reach it by clicking on the top right on Welcome -> Manage account.

3. Under Profile(s) click on the symbol (i) to the left of your name.

4. You can check the current tax forms on files by clicking on the respective forms in the row Tax Forms.

5. You can update your tax information by clicking on Update Tax Forms.

6. After verifying your address information, the second page will ask for your Tax Residency. You can add more than one by clicking on Add Another Tax Residency. You are required to provide the country of tax residency and the respective Tax Identification Number. You should always have your SSN on file (if available).

If you provided a US address, but only list tax residences outside of the US, Interactive Brokers requires further information from you. This should not be the case for most Americans abroad, as they continue to be taxable in the US (i.e., you should always list the US as your tax residency), as explained here.

The following scenarios do not apply to US citizens or permanent residents, as they always count as residents for tax purposes (US persons). In certain situations, you may have a US address, but are not a tax resident in the US:

• You are a student or researcher on F1 or J1 visa and live in the US, but are actually a non-resident for tax purposes due to the exempt individual clause explained here.

• You own/rent property (such as a holiday or retirement house) in the US and intend to return here longterm (i.e., it is your permanent address), but you are temporarily living outside of the US and you are not a US citizen or permanent resident.

• You provided a reference address of family or friends, while you live outside of the US and you are neither a US citizen nor a permanent resident.

As non-resident you will also need to provide the IRS form W-8BEN regarding backup withholding. In particular, you will be able to claim tax treaty benefits, which typically leads to a reduced tax rate of only 15% US tax on dividends rather than 30%, depending on the country you live in. Note that this ensures that you are not required to file US taxes if this is your only US sourced income, as Interactive Brokers will directly deduct the required tax amounts. In order to claim tax treaty benefits Interactive Brokers may also require you to prove that you have a foreign address (e.g., by providing a bank statement). You will need to answer the respective questions truthfully and describe your situation. If Interactive Brokers is not satisfied with your answers, you might need to talk some representative directly to provide further information.