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Asian man sets up a sweep accountWhen managing your personal finances, it’s important to make the best use of every dollar. Setting up a sweep account at your bank or online brokerage is one way to do it. Sweep accounts allow you to earn interest on money that you’re not actively saving or investing. These accounts work by transferring unused funds into a high-yield savings or investment option at the end of each business day. If you have an opportunity to leverage a sweep account as part of your financial strategy, it’s helpful to understand how they work. Consult with a financial advisor to make sure you’re squeezing maximum value out of every investment dollar you have.

Sweep Account Definition

A sweep account is a special type of account that can be linked to a bank account or brokerage account. These accounts are designed to maximize funds that may be sitting idly by transferring or “sweeping” them into a higher yield investment option automatically. For example, your sweep account may push unused cash into a money market mutual fund or money market deposit account.

Transfers may be triggered when funds in your main account are above or below a certain threshold. You may be able to specify what target balance you’d like to maintain and when sweeps should occur.

Sweep accounts shouldn’t be confused with cash management accounts, which are also available at brokerages and robo advisors. Cash management accounts essentially combine features of checking accounts with savings accounts, in that you can use them to pay bills, transfer funds and make purchases or ATM withdrawals if they come with a debit card. A cash management account may earn interest on deposits and if offered by an online brokerage or robo advisor, come with fewer fees than traditional bank accounts. If you want to do more than just earn interest on unused cash, you may consider a cash management account in lieu of a sweep account.

Types of Sweep Accounts

Investor manages her moneyAs mentioned, you may be able to set up a sweep account at your bank or your brokerage. Sweep accounts at banks can be linked to personal and business accounts. At online brokerages, you may have the option to attach a sweep account to a taxable brokerage account or an individual retirement account. Regular sweep accounts offered by banks make it easy to earn interest on money, typically with little risk. If funds are swept into a high yield savings account or money market account, for example, that cash isn’t exposed to market volatility. You can earn a steady annual percentage yield (APY) and the money remains easily accessible in case you need to transfer it back to your main account. Depending on the bank, you may or may not pay a fee to have a sweep account as part of your banking package.

Brokerage sweep accounts operate along the same lines, though they can differ from bank sweep accounts in terms of where funds are transferred to. For example, instead of a money market deposit account, your uninvested cash may be swept to a money market mutual fund or a cash management account.

The goal is the same: helping you earn more interest on money you’re not actively investing. Depending on the brokerage, you may be able to use a sweep account to hold:

  • New deposits you aren’t ready to invest yet
  • Dividend payouts that you choose not to reinvest
  • Proceeds from the sale of securities in your portfolio
  • Funds in excess of a target brokerage account balance

Some robo advisors that offer sweep accounts may even sweep funds into low-risk exchange-traded funds (ETFs). This allows you to keep your money in the market but in the safest way possible and potentially with lower expense ratios compared to traditional mutual funds.

Benefits of Using a Sweep Account

It’s possible that you may have money in a bank account or brokerage account that’s earning zero interest. Sweep accounts help to solve that problem.

By moving money into higher-paying accounts or investment options automatically, you can get the benefit of growth without having to think too much about it. True, sweep accounts may not produce the same returns that you’d get by investing money directly into stocks, ETFs, mutual funds or other investments. But they can offer a safe and reliable way to keep growing your money.

There’s also another benefit of having a sweep account inside an online brokerage account. Sweep accounts can be a ready source of cash for investing. Ordinarily, you may have to wait several days for a transfer from a bank account to process. That could mean missing out on an investment opportunity.

Sweep accounts allow for quick and easy transfers to and from your brokerage account. So if you’re an active trader and you want to make a move on buying or selling a particular stock quickly, you don’t have to wait days for a transfer from your bank.

A sweep account can also be a tool for managing risk with your investments. Say you’re concerned about a potential downturn but you don’t want to pull your money out of the market completely. You may consider selling some of your higher-risk investments and transferring the funds to safer investments in your sweep account.

The money will continue earning interest while you decide what move you’d like to make next. Of course, timing the market isn’t an exact science and it’s possible that you could get it wrong. But having a sweep account on standby may be reassuring if you generally have a lower risk tolerance when it comes to choosing stocks or other investments.

How to Open a Sweep Account

Father teaching son about money management

If you’d like to open a sweep account at a bank, you can first check to see if they’re offered by your current bank. If not, then you’d need to shop around at both traditional and online banks to find one that offers sweep accounts for new customers. The same goes for sweep accounts at brokerages. If you don’t have an online brokerage account yet, opening one is fairly easy. Depending on the brokerage, you choose, you may be able to open an account with a low minimum deposit or no money at all. You’ll just need to deposit money before you can start investing.

If you choose a brokerage or robo advisor that offers a sweep account, make sure you understand how it works. Specifically, ask about:

  • When automatic transfers are triggered
  • How the money in the sweep account is invested
  • What fees you’ll pay, if any, to maintain a sweep account

While many online brokerages have adopted a $0 commission fee model when it comes to trading stocks and ETFs, they can still charge other fees, including fees for sweep accounts. Reviewing the fine print on sweep accounts can help you understand what you’ll pay to maintain it. If the money in your sweep account is invested in money market funds or ETFs, it’s also important to check out the expense ratios for those so you know what they’ll cost to own annually.

The Bottom Line

Sweep accounts, whether they’re offered by banks or brokerages, can help you get more bang for your buck when you have money that’s just sitting idle. The key is finding an account that matches your needs and financial goals. So be sure to compare what’s available from banks, online brokerages and robo advisors when choosing a sweep account option.

Tips for Investing

  • Consider talking to a financial advisor about the pros and cons of using a sweep account as part of your financial strategy. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help you connect with professional advisors in your local area. It takes just a few minutes to get your personalized advisor recommendations online. If you’re ready, get started now.
  • One way you can get a quick and relatively accurate overview of your investing is by taking advantage of a free, easy-to-use investment calculator.

Photo credit: ©iStock.com/whyframestudio, ©iStock.com/pcess609, ©iStock.com/kate_sept2004

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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