Orlando Harmon
Sweep accounts are a type of bank or brokerage account linked to an investment account that automatically transfers funds above or below a preset minimum. Banks offer sweep programs to provide customers with a way to ensure money is not sitting idly in a low-interest account when it could be earning higher interest rates in better liquid cash investment vehicles. An insured deposit program, also known as an FDIC sweep program, is a liquid alternative overnight investment that offers expanded FDIC insurance coverage. FDIC insured sweep deposit programs are administered in a variety of ways across the industry, with some banks offering high-interest rates on amounts over a certain balance.
| Characteristics | Values |
|---|---|
| Definition | Sweep accounts are simple mechanisms that allow any money above or below a set threshold in a checking account to be swept into a better investment vehicle. |
| Purpose | Sweep accounts were needed historically because federal banking regulations prohibited interest on checking accounts. Sweep accounts allow customers to earn interest on idle cash balances. |
| Benefits | Customers can earn interest on idle cash balances and manage risk with FDIC insurance while providing banks with an attractive, more diversified source of funding and liquidity. |
| FDIC Insurance Coverage | The standard FDIC insurance amount for deposit accounts is $250,000 per account holder per insured bank for each ownership type and $250,000 per owner per insured bank for self-directed retirement accounts deposited at an insured bank. |
| Extended FDIC Insurance Coverage | The Expanded Bank Deposit Sweep will provide up to $1.25 million in FDIC insurance ($2.5 million for joint accounts with two or more owners). |
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What You'll Learn
- Sweep accounts: Mechanisms that allow money above a set threshold to be swept into a better investment vehicle
- FDIC insurance: Covers all types of deposits, including business and personal
- Demand deposit accounts: Allow for unlimited withdrawals and earn interest on idle cash balances
- Money market deposit accounts: Offer higher interest rates than ordinary bank accounts
- ICS and CDARS: Provide a secure way to insure high-balance deposits of $250,000 or more
Sweep accounts: Mechanisms that allow money above a set threshold to be swept into a better investment vehicle
Sweep accounts are a type of bank or brokerage account that automatically transfers funds above or below a preset minimum into a higher interest-earning investment option. They are a simple mechanism that allows any money above or below a set threshold in a checking account to be swept into a better investment vehicle. Sweep accounts are primarily used as a legal workaround to the prohibition on paying interest on business checking accounts.
Sweep accounts are useful for managing a steady cash flow between a cash account used for making scheduled payments and an investment account where cash can accrue a higher return. They are also used to manage risk. If you are concerned about market volatility but are not ready to exit the market, you could sell some high-risk investments and transfer the proceeds into a sweep account. This allows your money to continue earning interest while you consider your next steps.
Sweep accounts are typically set up daily from the checking account, and the return of funds can experience delays. They are often used by small businesses that rely on daily cash flow but want to maximize earning potential on sitting cash reserves. A business sets a minimum balance for its main checking account, and any funds over that amount are swept into a higher-interest investment product.
Sweep accounts may not be free, and broker fees may make the account less attractive. Brokerages typically use sweep accounts for individual investors to park money waiting to be reinvested, such as dividends, incoming cash deposits, and money from sell orders. These funds are typically swept into high-interest holding accounts or money market funds until an investor decides on future investments.
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FDIC insurance: Covers all types of deposits, including business and personal
Sweep accounts are a type of bank or brokerage account linked to an investment account. They are a simple mechanism that automatically transfers funds when the balance is above or below a preset minimum. Sweep accounts are a typical business tool, especially for small businesses that rely on daily cash flow but want to maximize earning potential on idle cash reserves.
FDIC insurance covers all types of deposits, including business and personal. FDIC insurance covers depositor accounts at each insured bank, including principal and any accrued interest, up to the insurance limit of $250,000 per depositor, per FDIC-insured bank, per ownership category. FDIC insurance covers traditional deposit accounts, and depositors do not need to apply for FDIC insurance. Coverage is automatic whenever a deposit account is opened at an FDIC-insured bank or financial institution.
FDIC ownership categories include single accounts, certain retirement accounts, employee benefit plan accounts, joint accounts, trust accounts, business accounts, and government accounts. FDIC insurance covers deposits received at an insured bank, but does not cover investments, even if they were purchased at an insured bank.
Extended FDIC Insurance Programs allow for large deposits eligible for protection that is backed by the full faith and credit of the federal government.
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Demand deposit accounts: Allow for unlimited withdrawals and earn interest on idle cash balances
A demand deposit account (DDA) is a bank account that allows for the withdrawal of deposited funds at any time without advance notice. They are often used for everyday spending and paying bills. Money in these accounts is highly liquid, and account holders can withdraw funds on demand. DDAs typically include savings, checking, and money market accounts.
Demand deposit accounts can pay interest on deposited funds, but they are not required to. When interest is earned, it is often a low yield compared to the returns of some investment accounts. The interest rates are usually minimal to modest. Demand deposit accounts can have joint owners.
There are two types of demand deposit accounts:
- Savings accounts: These are the most common type of DDAs. They typically earn a small amount of interest, known as the annual percentage yield (APY). The APY earned on a savings account is variable, meaning the bank can raise or lower it at any time. While savings accounts at large banks often earn low yields, higher rates can be found at online banks.
- Checking accounts: These accounts may or may not pay interest. Before 2011, federal banking regulations prohibited interest on checking accounts. Now, some banks offer high-interest rates on amounts over a certain balance. Checking accounts may charge various fees for handling the account.
Demand deposit accounts differ from term deposit accounts, also known as time deposit accounts, which restrict access to funds for a predetermined period. With a term deposit account, you buy a certificate of deposit (CD) for a set term, ranging from three months to ten years, and you generally don't touch it until the term is up. During this time, your money earns interest at a fixed rate, which is usually higher than the rate offered by DDAs. If you withdraw your money early, you will likely have to pay a penalty.
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Money market deposit accounts: Offer higher interest rates than ordinary bank accounts
Sweep accounts are a type of bank or brokerage account linked to an investment account. They are typically used to sweep excess cash into a money market fund, where it will earn more interest than an ordinary bank account. Sweep accounts were originally devised to get around a government regulation that limited banks from offering interest on commercial checking accounts.
Money market deposit accounts offer higher interest rates than ordinary bank accounts. They are a type of deposit account, but some money market accounts (MMAs) come with a debit card or checks. Institutions that offer these features may limit transactions to no more than about six times per month.
MMAs traditionally earn higher interest rates compared to standard savings accounts. The average MMA annual percentage yield (APY) is 0.48%, but some accounts offer more than eight times this amount. For example, the Discover® money market account has a 3.50% APY on balances below $100,000, and ZYNLO's money market account earns 4.40% APY.
MMAs are a great option for emergency funds, as they offer high yields while also allowing access to your cash. They are also beneficial if you need occasional access to your money or need transactions into and out of your account. Some MMAs use a tiered interest rate system, which pays higher interest rates to customers who hold higher balances.
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ICS and CDARS: Provide a secure way to insure high-balance deposits of $250,000 or more
ICS (Insured Cash Sweep) and CDARS (Certificate of Deposit Registry Service) are services that allow customers to access FDIC insurance coverage from a network of banks. FDIC insurance is provided by the federal government, protecting customers against the loss of their deposit accounts up to a standard maximum of $250,000 per account holder per insured bank.
ICS and CDARS allow customers to securely insure high-balance deposits of $250,000 or more by placing their funds into multiple CDs, each for an amount under the FDIC insurance maximum, at other CDARS Network institutions. This ensures that both principal and interest are eligible for FDIC coverage. Customers can also choose terms that best match their liquidity needs, such as 52 weeks or two years.
With ICS and CDARS, customers only need to open one account and deal with one bank to take advantage of the FDIC insurance coverage. The bank that the customer chooses will act as the custodian of their deposits. This saves time and reduces administrative burdens, especially during tax and financial reporting seasons. Customers can also make unlimited withdrawals on any business day using the ICS demand option or up to six program withdrawals per month using the ICS savings option.
It is important to note that the programs are designed to comply with all FDIC requirements, and customers' confidential information is not shared with the ICS and CDARS bank networks.
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Frequently asked questions
A sweep account is a type of bank or brokerage account linked to an investment account that automatically transfers funds above or below a preset minimum. An extended sweep deposit account is a feature of some banks that allows customers to earn interest on idle cash balances and manage risk with FDIC insurance.
Extended sweep deposit accounts are administered in a variety of ways. One common method is to use a dual account structure, with a money market deposit account (MMDA) and a demand deposit account (DDA). The bank will either receive a daily incoming wire or send a daily wire out. At the end of the month, the bank will be instructed on the amount of interest to credit to the DDA.
Extended sweep deposit accounts offer several benefits, including the ability to earn interest on idle cash balances, manage risk with FDIC insurance, and provide banks with an attractive, more diversified source of funding and liquidity. They also save time by allowing customers to work directly with one bank and receive a single monthly statement, and provide access to funds with unlimited withdrawals from money market deposit accounts.
Extended sweep deposit accounts may be a good option for those looking to maximize earning potential on sitting cash reserves. They are often used by businesses that rely on daily cash flow but want to maximize returns on excess cash. It is important to note that sweep accounts may not be free, and broker fees may make the account less attractive. It is recommended to consult with legal, tax, and/or financial advisors to determine if an extended sweep deposit account aligns with your specific situation and needs.
