Sweep accounts are bank or brokerage accounts that automatically transfer money that exceeds a certain threshold into an account that earns a higher level of interest. They can also be used to pay back loans or as a way of moving money from an investment account to a checking account when the balance falls below a certain amount. Sweep accounts offer a hands-off investment vehicle that can ensure your money is earning a return. There are both personal sweep accounts and business sweep accounts.
Managing your personal finances can be a frustrating experience that leaves you fearing for your financial future. You might be looking for ways to make your money work for you outside of a typical checking account — especially if you’re one of the many people who are unable to afford the advice of a financial advisor or a minimum investment in the stock market.
A sweep account helps do some of that work by allowing you to earn interest on money that you’re not actively saving or investing. By transferring unused funds into a high-yield savings or investment account at the end of each business day, your money can grow without constant oversight or management on your part.
What is a sweep account?
A sweep account is a bank or brokerage account that automatically transfers funds that exceed a certain threshold into investment accounts that earn a higher level of interest, such as money market deposit accounts or a money market mutual fund. The sweep occurs at the close of each business day. A sweep account may also transfer excess funds toward loan payments.
How do sweep accounts work?
Sweep accounts are used to “sweep” excess cash into a money market account, where it will earn more interest than it would in a normal bank account. They can also work in the other direction, whereby the bank moves funds from an investment account to a checking account when the owner’s balance falls below a certain amount.
Sweep accounts can also be used to pay back loans instead of earn interest. The same process as described above applies, except that instead of the bank or brokerage account putting excess funds into an investment account, the extra money in your checking account will be put toward loan payments. This can help make paying off debt easier.
How to open a sweep account
If you’re interested in opening a sweep account, first check to see if they are offered by your bank or brokerage firm.
You’ll want to review the fine print on your sweep account so that you understand what you’ll have to pay to maintain it. Although many online brokerages have adopted a $0 commission fee model, they may still charge fees for sweep accounts.
Additionally, you’ll also want to ask when automatic transfers are triggered and how the money in the sweep account is invested.
Personal sweep accounts
Personal sweep accounts are typically used by brokerages to store client funds until the account holder decides how they want to invest their money. For example, a sweep account might move excess cash to a money market fund, where it will earn greater returns than it would by sitting in an ordinary bank account.
These funds are typically swept into a high-interest holding account such as a money market mutual fund until the investor can make a decision on future investments or until the broker can execute already standing orders within the investor’s existing portfolio.
Business sweep accounts
With a business sweep account, a business sets a minimum balance for its main checking account, with any excess funds being swept into a higher-interest investment account. If the balance of the account ever dips below a certain threshold, the funds are then swept back into the checking account from the investment account.
Sweep accounts are commonly used by businesses, especially by small businesses that have large cash flows. They allow companies to earn interest on excess cash reserves while also ensuring that they have enough cash on hand to pay for business expenses.
Zero balance accounts
Some businesses also utilize sweep accounts to maintain a zero balance account, which is a bank account that intentionally keeps a balance of $0. A business only funds the account when items need to be paid — any remaining cash (after deposits) at the end of the business day is then transferred into a sweep account.
Why should I use a sweep account?
Sweep accounts can take a lot of the burden of financial management off your plate by allowing your excess funds to work for you more efficiently. They offer a reliable hands-off approach to growing money, which can be beneficial to individuals lacking the time or skills needed to manage their cash flow and investments. They are also a safe investment vehicle for excess money you aren’t sure what to do with: like most checking and savings accounts, sweep accounts are FDIC insured up to $250,000.
Benefits of sweep accounts
The main benefit of sweep accounts is that they are an easy way to ensure that your money is earning a return rather than remaining stagnant in a low-interest bank account. The funds in a sweep account are often liquid, meaning they are easily accessible.
Opening a sweep account inside of an online brokerage account can make your money a ready source for investing. Ordinarily, you have to wait several days for a transfer from a separate bank account to process, but when you have a sweep account attached to an online brokerage account, that money is immediately accessible.
Drawbacks to sweep accounts
One of the main drawbacks to using a sweep account is that there may be delays if you need to move money from a sweep account back into a checking account, which might lead to cash-flow issues. You may also have to pay fees that could be higher than the interest you earn on the account, especially if you incur penalties from early withdrawals of funds.
Additionally, if your money is deposited into an investment account that isn’t insured by the Federal Deposit Insurance Corporation (FDIC), or if it exceeds $250,000, it might not be protected should your financial institution fail. FDIC insurance only covers funds in such accounts as checking, savings, money market, and certificates of deposit (CDs), and only up to $250,000.
Sweep accounts also don’t offer the same returns that you’d get by investing directly into stocks, exchange-traded funds, mutual funds, or other investment options.
What is a sweep account in a bank?
A bank sweep account automatically transfers funds that exceed a certain threshold at the end of each business day. The funds are moved from a checking account into an investment account that earns a higher level of interest.
Alternatively, sweep accounts can also work in the other direction, whereby the bank moves funds from an investment account into a checking account when the owner’s balance falls below a certain threshold.
What is the benefit of a sweep account?
Sweep accounts come with several benefits. The main benefit is that they offer a safe and reliable way to grow your money, ensuring it earns a return rather than simply sitting in a low-interest checking account.
You can also sign up for a sweep account that moves excess money toward loan payments, helping you pay down debt.
Can I withdraw money from a sweep account?
Yes, you can withdraw money from your sweep account. Normally, you’d have to wait several days for a bank account transfer to process, but with a sweep account, that money is immediately accessible.
One of the main advantages of a sweep account service is that your money is liquid, meaning it’s readily available to withdraw whenever you might need it.
Is a sweep account good?
A sweep account can be a good idea if you have extra funds on hand that you don’t want to invest in the stock market. Sweep accounts are an investment option that can help you earn interest on your money while also making it available for withdrawal should you need it for emergencies and other urgent expenses.
- A sweep account is a checking or brokerage account that automatically transfers money that exceeds a certain limit at the end of each business day. The funds are moved into an investment account that earns a higher level of interest, such as a money market deposit account or a money market mutual fund.
- A personal sweep account is typically used by brokerages to move excess cash to a high-interest holding account until the investor decides on future investments or until the broker executes standing orders in the investor’s portfolio.
- A business sweep account is typically used by small companies, wherein the business sets a minimum balance for its main checking account and excess funds are swept into a higher-interest investment account.
- One of the biggest advantages of a sweep account is that it offers a reliable way to grow your money in a high-interest account without having to tie it up in the stock market.
- Drawbacks to sweep accounts include the fact that you may have to deal with delays if you need to move money between a sweep account and a checking account. This has the potential to lead to cash-flow issues if you do not have enough funds on hand.
A sweep account is just one of multiple ways to make your money work for you. Looking for a savings account that will help your money grow faster? Check out our guide to the best high-yield savings accounts and find an interest-bearing account that’s right for you!
View Article Sources
- Investor Bulletin: Bank Sweep Programs – U.S. Securities and Exchange Commission
- Sweep Account Disclosure Requirements: Frequently Asked Questions – Federal Deposit Insurance Corporation (FDIC)
- Deposit Insurance At A Glance – Federal Deposit Insurance Corporation (FDIC)
- Financial Products That are Not Insured by the FDIC – Federal Deposit Insurance Corporation (FDIC)