When 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.
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What Is a Sweep Account?
A sweep account is a specialized financial tool that can be linked to a bank or brokerage account. Its primary purpose is to optimize idle funds by automatically transferring — or “sweeping” — them into higher-yield investment options. For instance, a sweep account might allocate unused cash into a money market mutual fund or a money market deposit account, helping your money work harder for you.
These transfers are typically triggered when your main account’s balance rises above or falls below a predetermined threshold. You can often set a target balance and customize when the sweeps should occur, allowing for greater control over your finances.
It’s important to note that sweep accounts differ from cash management accounts, which are also offered by brokerages and robo-advisors. Cash management accounts combine features of both checking and savings accounts, enabling you to pay bills, transfer money, make purchases and withdraw cash at ATMs, especially if they come with a debit card.
While they may also earn interest on deposits, cash management accounts often have lower fees than traditional bank accounts, particularly when provided by online brokerages or robo-advisors. If your goal is to do more than simply earn interest on unused cash, a cash management account could be a better fit than a sweep account.
Types of Sweep Accounts
As 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 transfer to. For example, instead of a money market deposit account, your non-invested 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
If you have money sitting in a bank or brokerage account that’s earning little to no interest, a sweep account could be a practical solution.
Sweep accounts automatically transfer idle funds into higher-yielding accounts or investment options, allowing your money to grow with minimal effort. While the returns from sweep accounts might not match the potential gains from direct investments in stocks, ETFs or mutual funds, they provide a secure and consistent way to keep your money working for you.
Another advantage of having a sweep account within an online brokerage is its role as an accessible source of cash for investing. Typically, transferring money from a bank account can take several days, potentially causing you to miss investment opportunities. With a sweep account, funds can be quickly and easily moved to and from your brokerage account, ensuring you’re ready to act when the right opportunity arises.
For example, if you’re an active trader aiming to seize a time-sensitive stock opportunity, a sweep account eliminates the wait time associated with bank transfers, keeping your investment strategy agile.
Sweep accounts can also help manage risk. If you’re concerned about market volatility but aren’t ready to exit the market entirely, you could sell some high-risk investments and transfer the proceeds into your sweep account. This allows your money to continue earning interest while you consider your next steps.
Of course, market timing is never foolproof, and there’s always a risk of misjudgment. However, having a sweep account as part of your financial toolkit can provide peace of mind, especially if you prefer a more conservative approach to investing.
How to Open a Sweep Account
If you’d like to open a sweep account, check to see if they’re available at 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 no money. 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 you trigger automatic transfers
- How you invest the money in the sweep account
- What fees you’ll pay, if any, to maintain a sweep account
Many online brokerages have adopted a $0 commission fee model when it comes to trading stocks and ETFs. However, 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.
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. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- One way you can get a quick overview of your investing is by using SmartAsset’s investment calculator. This will help you plan the returns you’ll need to reach your goals.
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