What Is a Sweep Account and How Does It Work?
Written by
Daria Uhlig
Edited by
Susan Kim
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The way to keep your spare cash growing is to save it in a high-yielding savings account or invest it in securities likely to generate good returns. Any lag in making your money work for you in this way is a missed opportunity to increase your wealth. A sweep account makes it easy to avoid those lags.
See: 3 Things You Must Do When Your Savings Reach $50,000
What Is a Sweep Account?
A sweep account is one into which a bank or investment brokerage automatically “sweeps” unused cash from a non-interest-bearing account into one that earns interest. The idea is to ensure that your money never sits idle.
Some banks offer sweep accounts to personal and business checking account customers. Investment brokerages use them to automatically move uninvested funds from investors’ accounts into an interest-bearing deposit account at a bank or into a conservative investment. In either case, the money gets moved back into its original account as soon as it’s needed.
How Do Sweep Accounts Work?
Sweep accounts automatically transfer unused funds from your checking account or brokerage account into a higher-yielding account where it earns interest, or into a loan account where it pays down the loan.
Bank Sweep Accounts
Banks frequently offer sweep accounts to business customers, but some personal bank accounts have them, too. The sweep account is typically linked to a checking account.
Unless you run your checking account down to a $0 balance each day, the account has idle funds — money that isn’t being used to pay expenses and is earning little or no interest just sitting in your account.
A sweep account lets you cap those idle funds at a certain amount. Anything above that gets moved into the sweep account after the close of business each day. The sweep account could be a high-yield savings account or a money market account, depending on the financial institution.
If you have a loan at that bank, you can designate the loan account as your sweep account. Idle funds are then used to pay down the principal balance, which leads to reduced interest charges.
Sweeps move in the other direction, too, when the sweep account is a savings account, money market account or line of credit at the same bank. Swept funds are moved back automatically to maintain the designated balance.
Bank Sweep Account Example
Say you receive weekly paychecks via direct deposits into your checking account. That account is the first place your money goes, but that’s not where much of it stays — you have bills to pay, including a line of credit at the same bank where the checking account is, and you’ve also made saving a priority. So you set up your loan account and a high-yield savings account as sweep accounts to receive excess funds. As part of that process, you also indicate a minimum balance for your checking account so the bank knows how much it can sweep.
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At the end of each day, the bank reconciles your account by crediting that day’s deposits and debiting any withdrawals. If the amount remaining exceeds the minimum you set, the bank will automatically sweep the extra money into the savings account and/or into the loan account, to pay down the principal. If your checking account balance falls below the minimum you set, money can be swept back into it to cover the shortfall.
Brokerage Sweep Accounts
Investment brokerage sweep accounts work similarly to bank sweep accounts, but instead of sweeping excess money from a checking account, they sweep uninvested funds from a brokerage cash account.
When you make a deposit into your brokerage account, it doesn’t go right into your investment portfolio. It goes into a cash account that serves as a payment account for the investments you purchase. Until you invest it, that cash is idle money — money that could be earning interest while you decide how you want to invest it.
Brokerages can sweep the money from a cash account into an FDIC-insured interest-bearing account, such as a savings account or money market account.
The bank accounts brokerages use as sweep accounts may be held by third-party banks. That way, it overcomes FDIC insurance limits. The FDIC insures up to $250,000 per account type, per depositor, per bank. If your cash account winds up with more than $250,000 in uninvested funds, the money won’t be fully covered unless it is spread across one or more additional banks, none of which holds more than $250,000. Wells Fargo, for example, lets its Wells Fargo Advisors customers have up to $1,250,000 in its bank sweep program. The money is divided among its five program banks.
Depending on the brokerage you use, you might be able to designate a money market fund as your sweep account. Ameriprise is one company offering this option. The money market fund is an investment product, so it’s not FDIC insured, although it could be protected by SIPC insurance in the event the brokerage goes under (vs. loses value). However, the fund’s portfolio contains high-quality, short-term, dollar-denominated debt securities. The drawback is that despite the fund’s objective to maintain a value of $1 per share, there’s no guarantee it will do so. It’s possible, albeit unlikely, that your shares will lose value.
When you want to invest your money, you can do so — it’ll come out of the sweep account automatically.
Example of a Brokerage Sweep Account
For this example, say you have a self-directed investment account at Fidelity. When your $5,000 tax refund hits your bank checking account in April, you transfer the money into your Fidelity account because you know you want to invest it, but you’re not ready to select your investments.
Fidelity sweeps cash account balances automatically, so you don’t have to do anything. Fidelity will deposit it into an interest-bearing account at one of its partner banks, which could be Chase, Discover, Morgan Stanley or another one it works with.
Had you deposited $500,000 instead of $5,000, Fidelity would have deposited $250,000 into a bank account and invested the overflow — the amount above the FDIC-insured limit – into a money market fund devoted to that purpose.
Imagine now that a month passes, and you’ve researched various investment products and are ready to purchase shares in a stock fund. You can purchase your shares right from your Fidelity account — Fidelity will automatically move the swept funds into the account.
Is a Sweep Account Right for Me?
Sweep accounts ensure that your money is always working for you. In the case of a checking account, think of it as an automated savings strategy that you essentially set and forget. Unneeded funds earn interest but are available to you whenever you need them. Investment sweep accounts are similarly beneficial. They let you deposit money into your brokerage account, where you won’t be tempted to tap into it for something other than investing, and give you time to research investments so you can make a good decision about how to invest the funds.
That said, there are also a couple of drawbacks. Money market fund sweep accounts are only SIPC-insured if the brokerage is a member. Otherwise, you could lose your money if the brokerage goes under. Also, whether you get the sweep account for idle checking account funds or brokerage cash account funds, you could be charged a fee for the sweeps.
For many consumers, a sweep account is a safe and easy way to earn extra interest on your idle money. Just be sure the fees won’t cancel out the gains.
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- Securities Investor Protection Corp. "What SIPC Protects."
