Every 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.
Third, many brokerages are now allowing you to set their money market fund as your default for the sweep account (but you have to make that choice)!
For example, Fidelity allows the following sweep account options (they call it the core account):
- Fidelity Government Money Market Fund (SPAXX) - 1.63% Yield as of October 1, 2019
- Fidelity Treasury Fund (FZFXX) - 1.62% Yield as of October 1, 2019
- Taxable Interest Bearing Cash - 0.94% APY as of October 1, 2019
As you can see, some of the choices above are much better than just keeping your money in cash not earning anything!
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%.
If you don't make a choice, many brokerages just keep your cash sitting there - doing nothing for you! You have to make a choice to put your money to work for you!
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?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.
Ashley @ Money Talks says
Thanks for this article. I didn’t know there was a name for that account. 🙂 Now I know.
Jackie says
Hm, I wonder if this is available on my account at Zecco….
Robert says
It should be – what are they doing with any cash in your account? Maybe nothing?
Miss T @ Prairie Eco-Thrifter says
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.
Miss T @ Prairie Eco-Thrifter says
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.
MoneyCone says
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.
Robert says
Nice job MoneyCone! That’s how you maximize it!
Phil says
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
Robert says
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.
David says
I’m in the same boat as Phil – setting up my E-trade account for the first time to take advantage of my company’s ESPP. I’m also confused about what the second option – “Credit interest” – means. Can you shed some light on that? Thanks!
Mai says
Is an FDIC Insured Cash Balance sweep account with 0.30% APY a good way to go?
Robert says
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 says
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!
mike says
I have an ira at TD AMeritrade. The mutual fund I have in there isn’t doing great so I want to sell the shares and then immediately buy a different mutual fund. I understand when I sell the shares, the money goes into my sweep account. But my question is, is the sweep account still considered part of my IRA? I just want to go with a different mutual fund and don’t want a taxable event.
Thank you
Robert Farrington says
Yes, the sweep account is still part of your IRA – it’s inside of it. When you sell, the money goes into the sweep account. When you buy your new mutual fund, the money is taken out of the sweep account.
Mike says
Thanks Robert! Glad I found your site, bookmarked!
Joe McNulty says
From the information I have read on this site, it appears that the ‘sweep account’ that is currently part of my IRA should NOT have thousands of dollars in cash just sitting there.
The IRA is managed by my advisor.
How would I phrase my question as to why that money is just sitting there? I don’t wish to sound aggressive but I would like to know what’s happening with that cash; If I understand what I read from your page, there’s a good ‘chunk of change’ sitting there.
Is it ‘liquid’ (i.e. can it be withdrawn with no taxes/penalties)??
Robert Farrington says
It’s just cash sitting there. Ask your advisor why it’s not invested? Is cash part of the allocation you created when you setup this plan?
It’s liquid, in that it’s cash. Can it be withdrawn – no. The IRA rules still apply.
Since you mention an advisor, I recommend you read this article as well: https://www.thecollegeinvestor.com/20678/how-honest-financial-advisors-should-disclose-their-fees/
Troy says
i m new to all an any of this, so id like to know if there is an option that allows you to automatically reinvest my profits on a stock into said stock if it does excell?
Robert Farrington says
Hi Troy,
I’m a bit confused by your question. You only get profits when you sell a stock. If you wanted to re-invest in the same stock, why would you sell?
Liza says
So my boyfriend’s former employer rolled his retirement accounts to a cashsweep account after they went out of business, and we just found out that his money has just been sitting doing nothing for a year. It has “Rollover Traditional IRA” listed as the account type so would these dollars still be pre-tax in this account? I’m wondering if he can roll it into a traditional IRA or a ROTH IRA? He doesn’t know what kind of account it was while he was still employed there.
Robert Farrington says
It’s in a traditional IRA if that’s what it’s listed as – that means it’s still pre-tax. He just never went in and invested the money, so it’s just sitting there.
You don’t need to change accounts – you just need to make an investment choice.
Judy Cobb says
Does the FDIC coverage limit apply in a sweep account, ie: $250,000. Per account holder?
Robert Farrington says
Yes, most sweep account positions are FDIC insurance. You need to confirm with your institution and sweep selection, but in general they are.
Bob Hager says
I have a E*TRADE traditional IRA account. How do I check the balance of a sweep account?
Robert Farrington says
It’s usually under balances or positions. How is your cash held?
Bob Hager says
I figured it out. I had one position to reinvest the dividends and another position to hold the dividends in cash. It was in the cash balance so when I purchased more shares that’s when I figured it out. I thought I had checked the reinvest button.