What is a Sweep Account and How Do I Use It?

ScottradeEvery brokerage account has what is called a “sweep” feature or sweep account.  It can be both a benefit or a detriment depending on how you use it and what options you selected when you set it up.

When you setup a new brokerage account, you usually have to assign what you do with your cash.  This is called the sweep.  As you deposit cash into an account, it will, by default, go into the sweep.  Also, if you elect to have dividends paid in cash, they will sweep into the account.

The great thing about the sweep account is that when you want to buy more securities, the cash is automatically swept back into your brokerage to buy the securities.   If you trade on margin, the cash in your sweep account will also be counted towards your margin requirement.

 

Benefits of a Sweep Account

There are several benefits of setting up a sweep account correctly.  First, most sweep accounts are FDIC insured, which provides your cash with a level of protection.  Second, you can earn interest on the money in the sweep.  If the money just sat in your brokerage, chances are you would earn nothing.  To earn some interest with the cash outside of a sweep account, you would have to invest in a money market fund.

 

Dangers of a Sweep Account

It is important to note that sweep accounts are one of the most profitable products that investment firms offer.  You may wonder why?  Because most individuals don’t set them up correctly, and as a result, the firm pays you nothing on you cash.

When setting up your sweep account, look at the options available to you.  Money market, savings accounts, etc.  Don’t just settle for a yield of 0.01%.

 

Taking Sweep Accounts To The Next Level

Some institutions are very flexible with what you use as your sweep account.  There are some that even let you link your sweep account to your regular checking account.  This can be very convenient if you draw on the cash in your brokerage regularly.  On the same front, if you have a high-yield savings account, this could be a great sweep account.

It is important to note that the sweep feature is only available on standard brokerage accounts.  If you have a retirement account, you need to look at how your cash is being handled in the account.

Readers, are you maximizing your sweep account, or is your cash just sitting there?

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  • http://www.moneytalkscoaching.com/blog-2 Ashley @ Money Talks

    Thanks for this article. I didn’t know there was a name for that account. :) Now I know.

  • http://www.thedebtmyth.com Jackie

    Hm, I wonder if this is available on my account at Zecco….

    • http://thecollegeinvestor.com Robert

      It should be – what are they doing with any cash in your account? Maybe nothing?

  • http://www.prairieecothrifter.com Miss T @ Prairie Eco-Thrifter

    Like Ashely, I didn’t know there was a name for this. Thanks for sharing. I think this is how my investment brokerage is set up with TD Waterhouse.

  • http://www.prairieecothrifter.com Miss T @ Prairie Eco-Thrifter

    Like Ashely, I didn’t know there was a name for this. Thanks for sharing. I think this is how my investment brokerage is set up with TD Waterhouse.

  • http://www.moneycone.com MoneyCone

    I’ve set my high yield account as my sweep. I get a great interest rate on cash and dividend money that’s not reinvested.

    As you say, pay attention to how you set up your sweep accounts. If I had chosen the default account provided by my broker, I would’ve got next to nothing as interest.

    • http://thecollegeinvestor.com Robert

      Nice job MoneyCone! That’s how you maximize it!

  • Phil

    I have a question regarding sweep options. I am setting up an etrade through my employers stock purchase plan right now and I have to choose my sweep options. or what I want done with my un-invested cash. Everything is done through etrade and all the sweep options available yield .01% with very few at .05%. any insight on what other options I have? There is one other option of “credit interest” but I am not sure on what it is I have attempted to research it but I haven’t had any luck. Any help would be greatly appreciated

    • http://thecollegeinvestor.com Robert

      You don’t have a lot of options with a sweep account – the goal is to not keep any money there. Instead, you want to keep it invested. Just choose the option that gives you the best return, and realize that you want to invest any money that’s sitting in your sweep. A sweep account isn’t an investment, but just like a savings account at the brokerage.

  • Mai

    Is an FDIC Insured Cash Balance sweep account with 0.30% APY a good way to go?

    • http://thecollegeinvestor.com Robert

      It’s probably going to be one of the best you’re going to find out there right now, so I would say yes.

      • Mai

        What if it’s compared to a state-specific tax-exempt money market fund, which is not subject to either federal or state tax, with 0.01% 7-day yield; is the 0.30% APY Cash Balance account better or vice versa? Thanks Robert!