What Is a Sweep Account?
A sweep account is a financial tool offered by banks and brokerages that automatically transfers excess funds from a checking account into a higher interest-earning investment option at the end of each business day. Typically, the surplus cash is swept into a money market fund.
**Key Takeaways**
- A sweep account automatically moves idle cash into a higher interest-earning investment like a money market fund daily.
- It helps minimize cash drag by leveraging immediate access to higher-interest accounts.
- However, users should be aware that sweep account services may come with fees, impacting their net benefit.
Understanding Sweep Accounts
Sweep accounts, utilizing tools such as sweep funds, enable customers to earn maximum interest with minimal intervention by automatically relocating funds to high-interest accounts at the close of the business day. In this system, a bank’s computers assess customer deposits and move excess funds into money market deposit accounts.
Similar features are available in some brokerage accounts, offering investors additional returns on unused cash. Sweep accounts serve as efficient mechanisms that sweep funds above or below a designated threshold from a checking account into better investment options. Historically, such accounts were necessary due to federal regulations that barred interest on checking accounts.
Sweep accounts were initially devised to navigate government rules restricting banks from providing interest on commercial checking accounts.
Whether for personal or business use, sweep accounts help prevent money from idly sitting in low-interest accounts, redirecting it to investment tools offering higher returns and liquidity, including money market mutual funds and high-interest savings accounts.
Users should monitor sweep account costs, as potential gains from better investment returns might be offset by associated fees, which can be flat or percentage-based.
Sweep accounts may not be free, and broker fees can impact the overall attractiveness of the account.
Personal Sweeps vs. Business Sweeps
Individual investors commonly use sweep accounts with brokerages to temporarily park funds like dividends, deposits, or sell order proceeds, which are then transferred to high-interest accounts or money market funds until investment decisions are made.
Business sweep accounts are vital for companies, especially small businesses managing daily cash flows while aiming to maximize the potential return on cash reserves. These accounts maintain a minimum checking account balance, sweeping excess funds into higher-interest avenues, and using credit sweeps to pay down credit lines as needed.
Sweep processes vary by institution and investment vehicle, typically occurring daily from checking accounts with occasional delays in fund returns. Changes in checking account regulations have also led some banks to offer attractive interest rates on high balances.
**How Do Sweep Accounts Work?**
A sweep account is a financial tool that links a bank or brokerage account to an investment account, automatically transferring funds when balances exceed or fall below a predetermined threshold. This process commonly involves moving excess cash into a money market fund for higher interest earnings. Conversely, funds can be transferred from an investment to a checking account when balances dip below a set limit.
**What Is the Difference Between Personal and Business Sweeps?**
Personal sweep accounts are utilized by individual investors through brokerages to hold funds until investment decisions are made. On the other hand, business sweeps cater to small companies managing cash flow, allowing them to earn interest on spare cash reserves while ensuring sufficient liquidity for operational expenses.
**Why Are Sweep Accounts Useful?**
Whether for personal or business purposes, sweep accounts are a convenient way to ensure that funds are actively earning returns instead of remaining idle in low-yield bank accounts. Auto-sweep features offered by some institutions facilitate automatic transfers between sweep and non-sweep accounts based on defined thresholds.
The Bottom Line
Sweep accounts facilitate the movement of excess cash between a client’s cash account and investment account. When balances in the cash account surpass a minimum threshold, the surplus is automatically shifted to the higher-earning investment account, enabling the client to earn interest on unused funds.