Guide to Sweep Accounts

A sweep account automatically transfers (or “sweeps”) money from one account into a separate account, with the aim 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 a good idea to do so. Here’s what you need to know.

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 utilize a sweep account, you set a threshold — for example, 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 insure 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

For example, you can 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 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 — but 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 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 worthy 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.

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 is important for individual investors. Why leave money idling in a checking or savings account when it could earn a few more dollars?

A sweep account is also important for businesses, particularly small businesses, which 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 get more growth, potentially, by investing the cash.

It’s possible to 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.

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 — 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 — 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 FDIC insurance coverage ($250,000 per account).

Pros of Sweep Accounts

•   May help you to earn higher interest rates or possibly investment returns.

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

•   Some sweep accounts are FDIC-insured (by the Federal Deposit Insurance Corporation), or they may be protected by SIPC (the Securities Investor Protection Corporation).

Cons of 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 maximize 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 an effortless way to leverage their spare cash. Although returns can vary, and with brokerage accounts there is always the risk of loss, sweep accounts provide an important function by putting your cash to work.

If you want your cash to earn more, but you still want easy access to your money, consider SoFi’s mobile banking app. It’s a new all-in-one account with a competitive interest rate. Eligible account holders can earn a competitive APY when they sign up for direct deposit. And SoFi doesn’t charge management or account fees.

FAQ

Is a sweep account good?

Sweep accounts can be useful if you have multiple accounts with different cashflows, and you want to make sure your spare cash is always earning the most it can.

Can you lose money in a sweep account?

Not really. A sweep account generally does not hold money itself; it just sweeps funds from one account to another. So a sweep account itself will not lose money, though it is 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 a sweep account, you can set a minimum threshold for your checking account, for example, and then automatically sweep any excess funds into a money market fund at the end of each day.

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