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Money market and checking accounts are both safe places to store your cash, have access to your funds, and earn a bit of interest. However, they are not identical. Money market accounts generally offer higher interest rates but may require higher minimum deposits and balances, and they may also restrict how many transactions you can make per month.

Understanding the differences between these two accounts and their pros and cons can help you determine which is the best choice for your needs.

Using both account types can help you separate day-to-day spending from savings you want to keep liquid while earning interest.

What Is a Checking Account?

A checking account is a deposit account where you can keep your money, safely store your earnings, and manage your everyday spending. A deposit account, if you aren’t familiar with the term, is a type of bank account that lets you deposit and withdraw funds.

Unlike a savings account (which is often designated for an emergency fund and future goals, such as a new car), a checking account is designed for frequent use, such as paying for your living expenses and basic purchases.

Checking accounts often feature unlimited transfers, deposits, and withdrawals. If the checking account is with a bank, the funds are likely protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per account ownership category, per insured institution. If the account is with a credit union, the money is likely insured up to the same limits by the National Credit Union Administration (NCUA).

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

What Is a Money Market Account?

A money market account is also a deposit account. If you’re putting different deposit accounts on a spectrum, a money market account leans more toward the savings account end of the range. They tend to have higher interest rates than checking accounts and are typically better suited to storing your funds for future goals.

Money market accounts are insured by the FDIC and NCUA, depending on whether it’s a bank or a credit union, in the same way as checking accounts. However, these accounts often have limits on certain transactions. Another feature to note: They may require a minimum opening deposit (and sometimes a minimum balance), depending on the institution.

Recommended: Money Market Account vs Certificate of Deposit (CD)

Key Differences

Here are some key differences when comparing money market vs. checking accounts.

Interest Rates

You have a better chance of finding a higher interest rate on a money market account vs. a checking account. (Some checking accounts offer no interest at all.)

The national average interest rate for money market accounts is 0.56% (as of March 16, 2026), but you’ll likely find higher rates than that. Some financial institutions offer money market accounts with APYs above the national average. On the other hand, the national average rate for interest checking accounts is 0.07%.

Accessibility of Funds

As checking accounts are made for everyday purchases, they are designed for frequent transactions, such as transfers, deposits, and withdrawals. A money market account will likely provide similar forms of access to your money, such as check-writing privileges, debit card transactions, and ATM withdrawals. However, how often you can conduct these transactions with a money market account may be limited, as you’ll learn in the next point.

Transaction Limits

With a checking account, you typically can access your funds as often as you like. With money market accounts, this may not be the case. While the Federal Reserve removed previous caps on monthly limits for withdrawals and transfers set by Regulation D, a bank or credit union might still set limits. You could find yourself restricted to, say, six transactions of a certain kind per statement period. It’s therefore important to read the fine print on your account agreement or to ask a customer service representative for details.

Opening Deposit Requirements

Another key difference between a money market account and a checking account is the minimum requirements. A money market account may require a minimum opening balance, and some accounts also require you to maintain a minimum balance to avoid fees or to earn the advertised APY.

Checking account requirements can vary by institution and account type. Some accounts may have minimums while others do not. Plus, you might need to maintain a higher monthly balance. Stashing a larger sum of cash (say, $2,500) in your money market account may be necessary to earn more interest and lower account fees. Standard checking accounts typically don’t have these conditions, although some premium accounts do require higher balances.

Pros of Checking Accounts

When comparing these two financial products, ponder the pros and cons of checking accounts. First, consider their advantages:

•   Low opening deposit: You may need to make an initial deposit to open a checking account, which is usually between $25 and $100, depending on the institution and account.

•   Convenient access: You can typically access the funds in a checking account as often as you like via a debit card, an ATM, electronic transfers, or checks.

•   Bill pay: You can usually set up automatic bill pay so your financial institution sends funds to payees on your behalf. Plus, you can set up autopay with different companies so that they can deduct funds from your checking account to pay for bills each month, such as utility bills, insurance premiums, and credit card payments.

•   Debit card: When you open a checking account, you typically receive a debit card for everyday purchases, whether in person or online, and for withdrawing cash at an ATM.

Cons of Checking Accounts

Now, consider some of the downsides of a checking account:

•   Low interest: Checking accounts aren’t designed to grow your savings — they’re designed to pay bills, make everyday purchases, and constantly move money in and out frequently. As such, they don’t feature high interest rates, and some may not earn any interest.

•   Monthly service fees: A checking account may charge a monthly service fee. However, you might be able to opt out of these fees by maintaining a minimum balance or receiving a certain amount in direct deposits in a statement cycle.

•   Other fees: You might also have to pay out-of-network ATM fees, overdraft fees, bounced-check or returned-payment fees, and paper-statement fees with a checking account.

Pros of Money Market Accounts

Here are some advantages to opening a money market account:

•   Higher interest rates: You will typically enjoy a higher rate with a money market account than with an interest checking account, and money market rates can be comparable to savings account rates. Rates vary depending on where you bank.

•   Access to cash: Unlike a CD, your money isn’t locked in your money market account for a specific term. Instead, you can access your money and use a linked debit card to make purchases or ATM withdrawals.

Cons of Money Market Accounts

Next, review some potential drawbacks to money market accounts:

•   Transaction limits: Depending on the financial institution, monthly transaction limits on certain transfers and withdrawals may be in place. For example, you might be limited to six withdrawals and transfers per statement period. If you exceed these limits, you might be on the hook for paying a fee, depending on the institution’s policy.

•   Opening deposit: Money market accounts typically require a minimum opening deposit. The amount depends on the bank or credit union.

•   Fees: As with checking accounts, you may find yourself paying several fees that can reduce the interest you earn.

Which Account Is Right for You?

When comparing a money market account to a checking account, a checking account may be a better fit if you intend to keep the funds for everyday use. Most adults have a bank account, with only 6% “unbanked” as of 2024. A checking account can be the hub of your daily financial life, as you have frequent access to withdrawals, transfers, and debit card spending.

It might also be a better fit if you’re looking for an account with lower minimum opening deposit and balance requirements, though these vary by institution and account type.

If you have a larger sum of money to keep in an account, want to earn more interest, and don’t anticipate needing to make a lot of transactions, a money market account could suit your needs better. It’s also important to review the initial deposit requirement and monthly minimum balance before making your decision.

Using Both Account Types

Consider using both a checking and a money market account. For instance, you can use your checking account for your everyday spending and set up autopay on some of your recurring monthly bills.

Your money market account can be linked to pay a few of your bills. If you don’t touch your money market account otherwise, you can stay within any monthly transaction limits that may exist and earn a higher rate of interest, perhaps even an APY that’s competitive with high-yield savings accounts.

The Takeaway

While checking and money market accounts do share some similarities, they have important differences. A money market may offer higher interest, but it may also have higher opening deposit and balance requirements as well as transaction limits. Which account works best for you will depend on your preferences and unique financial situation.

If you’re considering where to keep your checking and savings account, see what SoFi offers.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Can a money market account replace checking?

It depends: A money market account can have limited monthly withdrawals. Plus, there might be a higher minimum opening deposit and a higher monthly balance requirement. That said, it could potentially replace your checking account if you don’t typically make many transactions with it, and the requirements mentioned don’t bother you.

Do money market accounts have debit cards?

Yes, some money market accounts come with debit cards, which can make spending easier. Money market accounts may have monthly caps on the number of transactions you can make by check, debit card, or electronic transfer, and these can vary by bank or credit union.

How do money market rates compare to savings?

Money market rates can be comparable to savings account rates. For context, the Federal Deposit Insurance Corporation (FDIC) offers national average rates (as of March 16, 2026) of 0.56% for money market accounts and 0.39% for savings accounts.

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SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2026 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 5/28/26. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
We do not charge any account, service, or maintenance fees for SoFi Checking and Savings. We do charge transaction fees for outgoing wire transfers, Instant Transfers, and global remittance transfers. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

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¹SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per depositor per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $3M through participation in the program. See full terms at SoFi.com/banking/fdic/sidpterms. See list of participating banks at SoFi.com/banking/fdic/participatingbanks.

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Qualified investors may be able to borrow money from a brokerage via a margin account to place bigger trades than they could with cash on hand, or to take a short position.

Most brokerages offer the option of making a taxable account a margin account, but only to qualified investors. Margin trading can amplify gains as well as losses, and it’s considered a high-risk strategy.

Because margin trading is essentially a loan from a brokerage, margin loans must be repaid with interest, plus any fees. Thus, when using a margin account it’s possible to lose more than you originally invested.

What Is a Margin Account?

As mentioned, a margin account is used for margin trading, which involves borrowing money from a brokerage to place trades or investments. A margin account allows you to borrow from the brokerage to purchase securities that are worth more than the cash you have on hand.

In this case, the cash or securities already in your account act as your collateral.

Margin accounts are generally considered to be more appropriate for experienced investors, since trading on margin means taking on additional costs and risks.

How Does a Margin Account Work?

Just as you can borrow money against the equity in your home, you can also borrow money against the cash or equity in your portfolio. Investors in the U.S. stock market who meet certain criteria can use borrowed funds to place trades (a.k.a., leverage) or to take a short position.

Some types of securities are eligible for margin, but some are not. Typically, highly volatile or low liquidity securities, such as IPO shares or penny stocks, are not marginable.

Margin accounts are highly regulated. Generally, you can borrow up to 50% of the securities you plan to buy. So, if you have $5,000 in cash or equities in your margin account, you can borrow another $5,000 to purchase up to $10,000 of securities on margin.

Investors are then required to keep a minimum amount of cash or equity in their accounts, known as maintenance margin.

The Financial Industry Regulatory Authority, or FINRA, requires a minimum maintenance margin of 25% as an industry baseline. But individual brokerage firms may have their own requirements.

Cash Account vs. Margin Account

When defining a margin account, it helps to understand its counterpart — the cash brokerage account.

With a cash brokerage account, you can only buy as many investments as you can cover with cash. If you have $10,000 in your account, you can buy $10,000 worth of securities.

Ordinary cash brokerage accounts are not available for margin, generally speaking, because margin accounts must meet more stringent criteria.

Likewise, certain accounts like retirement accounts (such as IRAs or 401ks) generally operate like cash accounts; you cannot use leverage to make investments in retirement accounts.

There is something called limited margin in a Roth IRA or traditional IRA, but this refers to the practice of using unsettled funds to purchase securities; not the use of leverage.

Using Margin

To open a margin account, investors must make a minimum deposit of $2,000, or 50% of the securities they want to buy (whichever is the larger amount); sign an agreement with their brokerage; and pass a basic screening for investment knowledge, credit history, and so on.

The Federal Reserve’s Regulation T requires a minimum 50% initial margin deposit to place a trade. So, a qualified investor can typically borrow up to twice the amount of the collateral in their account to buy more shares (the exact terms depend on the brokerage). As noted above, a brokerage could require a higher amount as collateral.

For example, let’s say a trader wants to purchase 500 shares of Company A at $50 per share, but they only have $12,500 in cash. The trader may be able to use margin, which allows them to borrow another $12,500 to open a $25,000 position.

This amount is known as the initial margin requirement. In addition, investors must maintain a minimum balance in their margin accounts, known as maintenance margin, which is 25% of the total value of the securities in the account.

Recommended: What Is After Hours Trading?

Margin Account Rules and Regulations

To recap what a margin account is and how margin trading works: The Securities and Exchange Commission (SEC), FINRA, and other industry bodies have set some rules:

•   Minimum margin: There is a minimum margin requirement before you can start trading on margin. FINRA requires that you deposit $2,000 or 50% of the purchase price of the stocks you plan to purchase on margin, whichever is greater.

•   Initial margin: Your margin buying power has limits: Generally, you can borrow up to 50% of the cost of the securities you plan to buy. This means, for example, that if you have $10,000 in your margin account, you can purchase up to $20,000 of securities on margin. You would spend $10,000 of your own money and borrow the other 50% from the brokerage. (You can also borrow less.) Your buying power varies, depending on the value of your portfolio on any given day.

•   Maintenance margin: Once you’ve bought investments on margin, regulators require that you keep a minimum balance in your margin account. Under FINRA rules, your equity in the account must not fall below 25% of the current market value of the securities in the account.

If your equity drops below this level, either because you withdrew money or because your investments have fallen in value, you may get a margin call from your brokerage.

Example of Margin Trading

An example of using a margin account could look like this: Say you have a margin account with $5,000 in cash in it. This allows you to use 50% more in margin, so you actually have $10,000 in purchasing power. You’re able to actually make a trade for $10,000 in securities, using $5,000 in margin.

In effect, margin extends your purchasing power as an investor, and you’re not obliged to use it all.

Benefits of a Margin Account

For an experienced investor who executes various day trading strategies, having a margin account and trading on margin can have some advantages:

•   More purchase power: A margin account allows an investor to buy more investments than they could with cash. That might lead to higher returns, since they’re able to open bigger positions. In addition, they may be able to diversify their investments using margin.

•   A safety net: Just as building an emergency fund offers access to cash when you need it, so can a margin account. If you need funds but you don’t want to sell investments at their current price point, you can take a margin loan for short-term cash needs.

•   You can leave your losers alone: In another scenario, if you need cash but your investments aren’t doing so well, taking a margin loan allows you to keep your securities where they are instead of selling them right now at a loss.

•   No loan repayment schedule: There is typically no repayment schedule for a margin loan, so you can repay it on your own timeline, as long as your equity in the account maintains the proper threshold. Monthly interest will accrue on the loan, however, and be added to your account.

•   Potentially deductible interest: There may be tax situations in which the interest on a margin loan can be used to offset taxable income. A tax professional will tell you whether this is a move you can consider.

Risks and Drawbacks of a Margin Account

Despite the advantages, using a margin account has risks. Here are some things to consider before trading on margin:

•   You could lose substantially: While it’s possible that trading on margin can help realize greater returns if an investment does well, you will also see greater losses if an investment drops in value. And even if an investment you’ve purchased on margin loses all of its value, you’ll still have to repay the margin loan to the brokerage — plus interest.

•   There may be a margin call: If your investments drop, you must bring your account back up to the required minimum margin threshold or face what’s known as a margin call from your broker to restore the minimum allowable amount. If you don’t respond to the margin call, it’s also possible for a brokerage to sell securities in your account without alerting you.

How to Open a Margin Trading Account

Opening a margin account is not as simple as opening a cash account. You’ll likely need to sign a margin agreement with your brokerage, and meet certain criteria. You may also need to request margin for your account, depending on the requirements at your brokerage.

If you’re a beginner investor, a cash account gives you an opportunity to learn how to trade and invest, and there’s a low level of risk.

If you’re a more experienced investor and fully understand the risks of trading on margin, a margin account may offer the opportunity to expand and diversify your investments into short-term vs long-term investments.

Some financial advisors suggest that clients open margin accounts in case they need cash in a hurry. For instance, if you need money quickly, it takes time to sell investments and for the money to be deposited in your account. If you have a margin account, you can take a margin loan while your securities are being sold.

Margin and Short Selling

You also need a margin account for short selling. With short selling, you borrow a stock in your brokerage account and sell it for its current price. If the price of the stock falls — which you’re betting will happen — you repurchase shares of the stock and return it to the original owner, pocketing the difference in price.

Like trading on margin, short selling is a strategy for experienced investors and comes with a high amount of risk.

What Is a Margin Call?

If the equity in your margin account drops below a certain threshold, you may get an alert from your brokerage, known as a margin call. At this point you’re required to either deposit more money into your account, or sell securities to restore the equity that’s acting as collateral for your margin loan.

It’s worth noting that if your investment value drops quickly or significantly, you may find that your brokerage has sold some of your securities without notifying you. It’s not uncommon that investors are forced by a margin call to sell investments at an inopportune time — such as when the investment is priced at less than you paid for it. This is an inherent risk of trading on margin.

Understanding Margin Costs

Investors should also know about relevant margin costs. When you borrow money from the brokerage to buy securities, you are essentially taking out a loan, and the brokerage will charge interest.

Margin interest rates are different from company to company, and may be somewhat higher than rates on other kinds of loans.

Consider interest costs when you’re thinking about your margin trading plan. If you use margin for long-term investing, interest costs can affect your returns. And holding investments on margin means the value of your securities must hold steady.

How to Manage Margin Account Risk

If you decide to open a margin account, there are steps you can take to try to minimize the amount of risk you’re taking by using leverage:

•   Skip the dodgy investments: Trading on margin works if you’re earning more than you’re paying in margin interest. Speculative investments can be a risky portfolio move, since a swift loss in value can result in a margin call.

•   Watch your interest costs: Although there is no formal repayment schedule for a margin loan, you’re still accruing interest and you are responsible for paying it back over time, so limiting interest costs is wise.

•   Maintain some emergency cash: Having a cushion of cash in your margin account gives you a little wiggle room to keep from facing a margin call.

The Takeaway

A margin account is an account that lets you borrow against the cash or securities you own, to buy more securities or sell short. As with other lending vehicles, margin accounts do charge interest.

While margin accounts do come with risk — including the risk of losing more money than you originally had, plus interest on what you borrowed — they also offer benefits including more purchasing power and coverage for short-term cash needs.

If you’re unsure about the risks of using a margin account, it may be worthwhile to discuss it with a financial professional.

If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.

FAQ

Is a margin trading account right for me?

A margin account may be useful for a qualified investor, assuming they meet certain criteria in terms of experience and knowledge and risk awareness, as well as the financial capacity to use margin.

How much money do you need to open a margin account?

Before opening a trading account, investors will need a minimum of $2,000 in their brokerage account, or 50% of the desired position, per industry regulations.

Can you lose more than you invest in a margin account?

Yes. Because a margin loan must be repaid with interest, it’s possible to lose more than your original investment with a margin trade.

Do you pay interest on a margin account if you don’t use it?

No, you only pay interest on the amount you borrow from your brokerage. Note that interest rates on margin accounts may vary.

Should a beginner use a margin account?

It may be best for a beginner to stick to a cash account until they learn the ropes in the markets, as using a margin account can incur additional risks and costs.

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What is green investing — and how can it help make the world a better place (while making investors money)? Here’s what investors need to know.

A sweep account automatically transfers, or “sweeps,” money from one account into another, with the goal of earning a higher rate of return. This is usually done to prevent excess cash from sitting in a low-rate account, but sweep accounts can also be used to pay off loans.

Sweep accounts are set up to make these transfers automatically, usually at the close of each business day. If you have several different accounts with a particular bank or brokerage, you may be able to take advantage of a sweep account — and it may be worth considering.

What Is a Sweep Account?

A sweep account is typically used when you hold more than one account (e.g., personal checking and savings accounts or different brokerage or business accounts) at a single institution. To use a sweep account, you set a threshold, such as a certain balance in a checking account, and the sweep account will automatically move funds above that threshold into another account that earns a higher return (typically a money market mutual fund).

This helps to ensure that you don’t keep cash parked in low-interest accounts and that you’re maximizing the total return across all of your accounts.

Ways to Use a Sweep Account

As an example of how someone might use a sweep account, you may keep a predetermined amount in the checking account to pay your bills. Then, at the end of each business day, any excess money is swept into a savings account or money market fund that earns a higher interest rate.

A sweep account may also be used at a brokerage, where your contributions or deposits (as well as dividends or profits from selling securities) are transferred to an investment account like an IRA, which stands for individual retirement account, or a taxable account at regular intervals.

Benefits of a Sweep Account

Using a sweep account can offer a couple of benefits. It allows you to keep a set amount of money in your checking account, say, to make sure you have sufficient funds to pay your bills without overdrawing the account. It also allows you to take any funds above that amount and put them in an account with a higher return.

You can also set up a sweep account when you open a brokerage account. This can also be valuable because different investments may generate returns or dividends at different times, and the sweep account makes sure the money doesn’t sit in cash but gets reinvested and put to work.

How Do Sweep Accounts Work?

One of the golden rules of investing is to try to maximize your returns, subject to your risk tolerance. A sweep account can be a great tool to help you do that because it helps to overcome inertia, a common behavioral finance hurdle for investors.

Using a sweep account allows you to set an amount of money that you always want to keep in your main account. Then, at the close of each business day, any extra money is swept into a savings, money market fund, or brokerage account that may generate higher returns. Depending on where you want to sweep the funds, they can remain fairly liquid and accessible, or they can be part of a longer-term tax-efficient investing strategy.

You can also set up a sweep account to help pay off a loan or a line of credit — another potential use of your spare cash. Beware of fees, though. Some sweep accounts are complimentary, but some aren’t. You don’t want the cost of maintaining a sweep account to eat up the extra interest or returns you hope to earn.

Note, too, that there are no particular tax implications for using a sweep account.

Personal Sweeps vs Business Sweeps

Sweep accounts that are linked to your personal accounts work more or less the same as sweep accounts tied to business accounts. They both enable the swift transfer of funds from a low-interest-bearing account to one that potentially generates some income. This can be important for individual investors.

A sweep account is also important for businesses, particularly small businesses that have multiple accounts to handle various payments and cash flows. By setting up a sweep system, it’s possible to manage different income streams and achieve more growth by investing the cash.

You can also sweep money back into the main account if cash is needed to cover expenses, but sometimes this process takes more time. As a business owner, be sure to clarify what the holding periods might be.

💡 Quick Tip: Want a simple way to save more every day? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.

Types of Sweep Accounts

There are a number of different types of sweep accounts. Be sure to inquire at your bank or brokerage about the kinds of sweep accounts they offer, and ask about the terms and any fees that might apply.

•   Individual sweep account: This is typically used by a brokerage to store funds from a client until they decide how to invest the money.

•   Loan payback sweep account: Instead of sweeping the money into a money market or savings account, you can sweep excess funds to help pay off a loan.

•   Business sweep account: This allows you to sweep excess money from business accounts.

•   External sweep account: Some institutions can sweep cash into deposit accounts externally, which can increase the amount of Federal Deposit Insurance Corporation (FDIC) insurance coverage ($250,000 per account).

Pros of Sweep Accounts

As discussed, there are several upsides to sweep accounts, which can include:

•   Helping you earn higher interest rates or possibly investment returns

•   Occurring automatically at the close of each business day, so you don’t have to think about it

•   Possibly being FDIC-insured or protected by the Securities Investor Protection Corporation (SIPC)

Cons of Sweep Accounts

There are also cons to sweep accounts.

•   Your bank or brokerage may charge additional fees for using a sweep account, which might cancel out the interest earned.

•   If your money is swept into a brokerage account, it won’t be FDIC-insured (but it could be covered by the SIPC).

The Takeaway

A sweep account can be a great way to actively increase the amount of interest that you earn if you have multiple accounts. When you use a sweep account, you set a threshold amount that you want to keep in a specific account. Then, at the close of each business day, any excess funds are swept into an account that pays a higher interest rate (e.g., a money market fund).

Sweep accounts offer investors a way to leverage their spare cash. Although returns can vary, and with brokerage accounts, there’s always the risk of loss, sweep accounts provide an important function by putting your cash to work.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Is a sweep account good?

Sweep accounts can be useful if you have multiple accounts with different cash flows. They help ensure your spare cash is always earning the most it can.

Can you lose money in a sweep account?

Not really. A sweep account generally doesn’t hold money itself; it just sweeps funds from one account to another. So a sweep account itself won’t lose money, though it’s possible to lose money, depending on where you sweep the money to.

What is the benefit of a sweep account?

The main benefit of a sweep account is the ability to automatically control how much money is in your various accounts. With this type of account, you can set a minimum threshold for your checking account, for example, and automatically sweep any excess funds into a money market fund at the end of each day.

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When you open an individual retirement account (IRA) or 401(k), you can generally choose from a variety of investments, such as stocks, bonds, options, real estate, and more. You may also be able to put some of the money in a money market account (MMA), which typically earns a higher annual percentage yield (APY) than a traditional savings account but remains liquid.

While you might choose to keep most of your retirement savings in potentially higher-return investments, it may make sense to have some of your retirement funds in an MMA, since it’s a relatively low-risk place to store cash. Even if the return may be lower than other investments, it’s predictable.

Another reason to have some of your retirement savings in an MMA is to serve as a holding place as you sell investments or transfer money between them.

Unlike a regular MMA, one that is offered as a component of a retirement account is subject to the benefits and restrictions of the retirement account. Here’s what else you need to know about retirement accounts that offer a money market component.

What Is a Money Market Account That Can Be Used for Retirement?

While there’s no such thing as a “retirement money market account,” some custodians allow you to keep part of your money in a money market within your retirement account. The money market account (MMA) can be within a traditional, rollover, or Roth IRA, a 401(k), or another retirement account, which means those funds are governed by the rules of that account.

If the MMA is a component of a traditional IRA, that means you can contribute pretax dollars (up to certain limits), your money can grow tax deferred, and you won’t be able to withdraw funds before age 59½ without paying taxes and penalties.

Money held in the money market component is liquid. For some investment accounts, an MMA is used as the default position for contributions. In this case, money you transfer into the account and investments you sell will go into the money market component. You can use the funds in the money market to purchase investments within the retirement account.

Recommended: The Difference Between an Investment Portfolio and a Savings Account

What Is a Money Market Fund?

Bear in mind an important distinction: A money market fund, which is technically a type of mutual fund, is different from an MMA. A money market fund is an investment that holds short-term securities and isn’t insured by the FDIC. For example, these funds may hold government bonds, municipal bonds, and corporate bonds, as well as cash and cash equivalents.

An MMA is essentially a type of high-yield savings account, and it’s FDIC-insured up to $250,000.

How Does a Money Market Within Your IRA Work?

If you’re starting a retirement fund that has a money market component, you’ll want to make sure you understand how these accounts work. One major way they differ from regular MMAs is that they are governed by a retirement plan agreement.

This can place some limits on what you can do with the money. Typically, that’ll mean that you can’t withdraw the money until you have reached a certain age. But one advantage is that the money in the account will grow tax-free or tax-deferred (depending on what type of retirement account it’s in).

For example, an MMA in a Roth IRA would follow different rules than one in a traditional IRA.

•   You can deduct contributions to a traditional IRA, but a Roth IRA is funded with after-tax money.

•   You can’t withdraw money from a traditional IRA until you’re 59½, except under special circumstances.

•   Because contributions to a Roth IRA are post-tax, you can withdraw your contributions at any time (but not the earnings).

Advantages of a Money Market Account Held Within a Retirement Account

•   Since these accounts are held at a bank, they’re insured by the FDIC up to $250,000. By contrast, money held in a brokerage account is not FDIC-insured.

•   The money market component can be used to store proceeds of the sales of stocks, bonds, or other investments.

•   Many MMAs offer the ability to write checks against the account (just keep in mind that withdrawals are subject to restrictions).

Disadvantages of a Money Market Account Held Within a Retirement Account

•   MMAs offer a relatively low rate of return compared to what you might be able to earn in the market over time.

•   Opening this type of MMA requires opening a retirement account.

•   You may not be able to withdraw money until retirement age without paying a penalty.

Money Market Account Within a Retirement Account vs Traditional Money Market Account

The biggest difference between an MMA that’s part of a retirement account vs. a traditional MMA is where they are held. Unlike a regular MMA, the money market component is held inside a retirement account, such as a 401(k) or IRA.

While you can generally access money in a traditional MMA at any time, early withdrawal from a money market that’s part of a retirement account can trigger taxes and penalties.

Recommended: What is an IRA and How Does it Work?

What Should I Know About Money Market Accounts Held Within IRAs?

If you’re wondering how to save for retirement, there are a few things to keep in mind before opening a retirement account with a money market component.

The most important thing is that money put into the money market component is subject to the same conditions as any other money you invest into a retirement account. You generally won’t be able to access it without penalty until you retire.

You’ll also want to bear in mind that these are low-risk, generally low-return accounts. The money that you deposit or money that is automatically transferred isn’t going to provide much growth.

In some cases, when you open a retirement account, the funds will be automatically deposited in the money market component. In these instances, be sure to check that the money in that part of your account is then used to purchase the securities you want. Given the relatively low yield of an MMA, you may only want a certain portion of your savings to remain there.

Opening a Money Market Account That Is Part of an IRA

If you want to put some of your retirement savings in an MMA, you likely won’t be able to open the account separately, as you can with a traditional MMA.

Instead, you would open a retirement account with your bank, brokerage firm, or company provider. Depending on your IRA custodian, they may automatically include a retirement MMA as an investment option in your IRA.

Does It Make Sense to Put Retirement Funds in a Money Market?

There are many different types of retirement plans, so you’ll want to make sure to choose the options that make the most sense for you. While it might make sense to put some money into the money market component of your 401(k) or IRA, you might not want to put much money in it.

The reason for this is due to the relatively low interest rate that MMAs pay. In some cases, the interest rate may be lower than the rate of inflation. If so, the money kept in the money market component will lose purchasing power over time.

The one exception to this rule is retirees currently living off the money in their retirement accounts. These investors already in retirement will often want to keep some of their money in MMAs so they have to worry less about market volatility.

Alternatives to Money Market Accounts Held Within Retirement Accounts

There are a number of low-risk alternatives to MMAs, both within retirement accounts and outside them, such as a high-yield savings account. For similar alternatives within a retirement account, you could consider investing in bonds, bond funds, and other lower-risk investment options.

The Takeaway

An MMA is often a component of a retirement account, such as an IRA or 401(k). This type of account has the advantages of being FDIC-insured and fairly liquid. However, it may not earn enough interest to outpace inflation. Many investors will want to keep the money in their retirement accounts in investments that can provide higher rates of return. That said, one advantage of keeping some of your retirement funds in a money market is that it can be part of the low-risk cash/cash equivalents portion of your portfolio.

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FAQ

Can you keep some of your retirement funds in a money market account?

Yes, some retirement accounts offer a money market component. To keep some of your retirement savings in a money market account, you’ll need to open up an individual retirement account (IRA), 401(k), or other type of retirement account. Many retirement account custodians will include a money market account as one “investment” option for your account.

What is the difference between an IRA and a money market account?

A standard money market account is similar to a regular savings account. An Individual Retirement Account (IRA) is an account that allows you to save for retirement with tax-free growth or on a tax-deferred basis. An IRA can be used to invest in a variety of ways, and many IRAs will have a money market component to them.

What is the difference between a money market account and a 401(k)?

A money market account is similar to a savings account in that the money is liquid and earns interest. A 401(k) is a special tax-advantaged account designed to help people prepare for retirement.

With a 401(k), contributions are typically tax-deductible, and the money grows tax-deferred until retirement. You fund a money market account with after-tax dollars, and there are no tax benefits associated with these accounts. The only exception is if the money market account is a component of a retirement account. In that case, it’s governed by the rules of the retirement account it’s in.

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