What Is a Sweep Account?
A sweep account is a bank or brokerage account that automatically transfers amounts above a certain threshold into a higher interest-earning investment option. These transfers are made at the close of each business day.
In a brokerage account, unassigned funds from dividends, mutual fund distributions, or deposits can be swept into a higher-interest account. Funds may be held in that account until they’re either reinvested or withdrawn.
How Do Sweep Accounts Work?
In banking, sweep accounts allow any money above or below a set threshold to be swept from a checking account into a better investment vehicle. Sweep accounts were created because federal banking regulations prohibited interest on checking accounts.
A new brokerage account will be set up to place cash generated by the investments until it can be reinvested. When you want to buy more securities, the cash is automatically swept back into your brokerage to buy the securities. When you trade on margin, the cash in your sweep account will also be counted towards your margin requirement.
In both cases, a sweep account provides the customer with the largest amount of interest and the smallest amount of interference.
Sweep Account Rates and Yields
Some institutions offer flexibility for the sweep account, linking to a regular checking account, or to a money market or high-yield savings account. Sweep accounts guarantee that money is not sitting in a low-interest account when it could be earning higher interest rates elsewhere. Money market mutual funds, high-interest investment or savings accounts, and even ETFs and stocks are excellent options for a sweep transfer.
However, the benefits of higher returns from investments made outside the main account can be negated by the fees charged for the account. Fees could be calculated as a percentage of the interest or as a flat fee for each transfer. As always, it’s best to shop around for the best rates and read the fine print.