What Is a Sweep Account, and How Does It Work?

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 that. 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‘re considering 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 you can link 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 to a money market mutual fund or a money market deposit account. By moving the money over, the intent is to help your money work harder for you.

These transfers typically occur 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.

Types of Sweep Accounts

As mentioned, you may be able to set up a sweep account at your bank or your brokerage. You can typically link sweep accounts at banks 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 (IRA).

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 doesn’t have exposure 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 similarly, though they can differ from bank sweep accounts in terms of where funds transfer to. For example, instead of a money market deposit account, a brokerage sweep account may move your non-invested cash swept to a money market mutual fund or a cash management account instead. The goal is the same though: 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 in a relatively low-risk way.

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 to 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 can 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. This wait may cause you to miss investment opportunities. But with a sweep account, funds can be quickly and easily moved to and from your brokerage account. This ensures you’re ready to act when the right opportunity arises.

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 next steps.

How to Open a Sweep Account

If you’d like to open a sweep account, first check to see if they’re available at your current bank. You can also 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 exactly 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.

How Sweep Accounts Are Insured

Before parking a large sum in a sweep account, it’s worth understanding exactly how that money is protected. Coverage depends on where your cash actually lands once it’s swept.

Bank sweep accounts are generally covered by FDIC insurance up to $250,000 per depositor, per institution. This is the same protection that applies to an ordinary savings account. Since the funds are sitting in an actual bank deposit account, this coverage kicks in automatically.

Brokerage sweep accounts work a bit differently. The coverage depends on where the brokerage sweeps your cash. If your money lands in a money market mutual fund, it’s protected through SIPC coverage instead of FDIC. SIPC coverage protects you if the brokerage itself fails, but it doesn’t protect against investment losses. This is an important distinction from FDIC-insured deposits.

Many brokerages also run bank sweep programs, spreading your cash across several partner banks behind the scenes. The aim here is to stretch your FDIC coverage well beyond the standard $250,000 limit at any single institution. Most account holders never see this happening, since banks handle it automatically. Still, it’s worth knowing it’s part of how these programs work.

This becomes especially relevant if you’re sweeping a large sum, say, from an inheritance, a home sale or a big bonus, into one of these accounts while deciding what to do with it long-term. Without checking how your specific sweep account handles coverage, it’s possible to unknowingly sit above FDIC or SIPC limits, particularly if your brokerage doesn’t automatically spread funds across multiple banks.

Bottom Line

A father discussing sweep accounts with his son.

A sweep account, whether through a bank or brokerage, 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. 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 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.