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Do You Need a Rainy Day Fund If You Already Have an Emergency Fund?Sweep Account: What It Is and How It Works
If you want to automate the process of transferring money from one account into another to help you maximize interest earnings, consider opening a sweep account. This type of account automatically moves, or sweeps, money to a secondary account that earns a higher interest rate and ensures Federal Deposit Insurance Corp. (FDIC) protection when your balance exceeds the standard coverage limit.
Here’s what you need to know about how sweep accounts work and their pros and cons.
Key takeaways
- A sweep account is a bank account that automatically transfers money into a secondary account once you set a balance threshold.
- This type of account can help you earn higher returns on your investment or ensure FDIC insurance coverage.
- You can find business and personal sweep accounts, but they’re usually a good fit only if you have a large balance.
What is a sweep account?
A sweep account is a type of bank account that allows you to automatically transfer funds into a secondary bank or investment account when needed. Usually, this transfer occurs whenever the amount of money in the primary account exceeds or falls below a predetermined limit.
Many people, especially those who can afford to save large amounts of money, use sweep accounts for convenience and safety. Opening this type of account means you don’t have to worry about manually transferring funds between accounts regularly. Even better, in some cases, it can also help you verify that your money stays insured in the event of bank failure.
For example, if your account balance regularly exceeds the standard $250,000 FDIC insurance limit, you could use a sweep account to transfer any excess funds to a different type of account at the same bank. Or you could transfer between multiple accounts at partner institutions, which can help you access additional insurance coverage.
How do sweep accounts work?
Sweep accounts usually work like this:
- The customer uses a primary account — typically a checking account — to deposit money and manage day-to-day transactions.
- When the balance on that checking account exceeds a predetermined limit set by the customer, any excess funds are automatically “swept” into a secondary account or among a network of accounts.
- If necessary, the funds can also be “swept” backward to fund the original checking account when it falls below a certain balance threshold.
Types of sweep accounts
You will find a few different types of sweep accounts. Keep in mind that you can open both personal sweep accounts and business sweep accounts.
Beyond that, here’s what you need to know:
- Investment sweeps: Excess funds are swept into an investment account, such as a money market fund, to help you earn more interest on your balances.
- Loan or line of credit sweeps: You use excess funds to pay down the balance on an outstanding loan or line of credit, helping you become debt-free faster.
- Insured cash sweeps (ICS): Your excess funds are swept into secondary accounts at partner banks, allowing you to extend your FDIC insurance coverage.
- Zero balance sweeps (ZBA): With this business account, excess funds are swept from your main operating account into a secondary account that covers daily transactions, allowing you to maintain a zero balance.
Pros and cons of sweep accounts
PROS
- Easy account management: You can handle all of your transactions through one master account.
- Access to higher interest rates or more FDIC coverage: Depending on which type of sweep account you choose, it will likely either offer extended FDIC coverage or access to higher investment yields than you’d find using a traditional account.
- Convenience: With a sweep account, you don’t have to worry about manually transferring funds.
CONS
- Potential fees: Many financial institutions charge fees to manage sweep accounts. These can either be flat fees or a percentage of your balance or earnings.
- Monitoring required: Transfers happen automatically with sweep accounts, but they still require monitoring to ensure the money is moving around correctly and you won’t overdraft.
- Does not make sense for smaller balances: If you have a smaller balance, the hassle of setting up and maintaining a sweep account may be more trouble than it’s worth.
How to open a sweep account
Here’s a closer look at how to open a sweep account:
- Research providers. Not every financial institution offers sweep accounts. Be sure to research providers that offer the type of sweep account you’re looking for, and read any account disclosures to get a sense of the terms and fee structure.
- Consider your balance threshold. Every sweep account requires you to set a balance threshold. Essentially, when the balance on your account reaches that amount, any excess funds will be swept into your secondary account.
- Open the account. You’ll likely be able to open your sweep fund online, but sometimes, you may need to call the bank or credit union directly. You may also be able to visit a branch in person for account opening.
- Continually monitor your account. Keep an eye on your sweep account to make sure any balance transfers happen on schedule.