Cash Sweep Accounts 101
Published Aug. 30, 2024
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Many brokerages offer cash sweep accounts so investors can maximize interest on cash balances. Instead of your uninvested cash earning little to no interest, it earns a competitive rate, and you're still able to invest it at any time.
Keep reading for everything you need to know about cash sweep accounts, including pros, cons, and how to open one.
A cash sweep account takes funds exceeding a set threshold and puts them into investments that earn higher returns. Funds are swept automatically at the end of each business day. You still have full access to the funds in your account at all times.
While investors may be most familiar with the sweep accounts offered by online stock brokers, some banks offer sweep accounts, as well. There are also other types of sweep accounts, including ones designed for businesses and for repaying loans.
When a stock broker offers a cash sweep account, it invests your unused cash for you, and you receive the proceeds. Some brokers do this with all client accounts, while others make it an optional feature that you can turn on or off. The broker manages the entire cash sweep process, and no action is required on your part.
The process starts with your broker sweeping up excess cash in your account at the end of the business day. This can include dividends you've earned, proceeds from selling investments, and any money you haven't invested yet.
Once it has swept up the cash, your broker will invest it. You can find out where your broker invests this money in its cash sweep program's list of participating banks. Brokers often invest cash sweeps into the following:
Cash sweep accounts are useful for investors, but they have their pros and cons. Here's a quick breakdown.
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Here are the types of cash sweep accounts that are available:
To open a cash sweep account, find a broker that offers this service and fill out the application form. It's fast and easy to get a cash sweep account, as many brokers have them. Below, you'll find more about eligibility requirements and how to open an account.
Since cash sweep accounts are a type of brokerage account, the requirements to open one are the same. To open a brokerage account, you need to be at least 18 years old and a U.S. citizen or resident (some brokerages offer accounts for international investors). Here's the information you'll need during the application process:
You may be required to upload a scan of a government-issued ID, such as your driver's license or passport, to verify your identity. The broker may also require address verification, such as a bank statement or utility bill. Exact requirements vary depending on the broker.
Here's what to do when you're ready to open a cash sweep account:
After you've finished setting up your account, you can transfer money over to fund it. Your broker will take care of the rest, sweeping your cash and depositing the returns.
The most important considerations in a cash sweep account are the returns, fees, and insurance coverage. Here's what to look for specifically with each of these criteria:
A cash sweep account can be a useful tool, especially if you often have uninvested cash in your brokerage account. It also doesn't take up any of your time, since it's a hands-off process.
If you're looking for a new broker, you may want to check which ones have cash sweep accounts and what kind of rates they pay. Most investors have at least some cash sitting around in their accounts from time to time. By maximizing your returns on that cash, you can build wealth more quickly.
A cash sweep account is a good way to get a larger return on uninvested cash. Many brokers offer this type of account, and it's a benefit worth considering when deciding which broker to choose.
Yes, you can withdraw cash from a sweep account. Cash sweep accounts have the same level of liquidity as any other brokerage account.
Some cash sweep accounts charge fees, and not all of them offer competitive returns. Look for a cash sweep account with no fees, and compare yields before you decide which one to use.
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