What Is a Sweep Account?

Sweep Accounts Explained

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A sweep account is a type of bank or brokerage account that automatically transfers funds that exceed a predetermined amount into a higher interest-earning investment account. This transfer happens at the close of each business day and may work with an account located within the depository institution (internal sweep account) or one that is located outside of it (external sweep account). They may also be used to put excess money toward loan payments.

Let’s take a closer look at what a sweep account is and how it works. 

Definition and Examples of a Sweep Account

Checking accounts are a convenient spot to house and access money, but they generally don’t provide benefits like interest. If you don’t have the time (whether you’re banking as an individual or business), a sweep account can make it easy to earn a higher amount of interest on money that is just sitting in the bank. 

A sweep account can be paired with a bank or brokerage account and automatically transfers funds at the end of each business day. The funds are transferred into a higher interest-earning investment option, often times a money market mutual fund.

This higher interest-earning account can be internal within the same depository institution or can be external.

So, how exactly does a sweep account work? Let’s say you have a sweep account with a minimum sweep amount of $5,000. Any time your balance exceeds $5,000 at the end of the business day, the amount in excess will automatically be transferred to the designated account with the higher interest rate. So if you end the day with $7,000, $2,000 will be transferred. 

How Sweep Accounts Work 

A sweep account “sweeps” funds between a checking account and an account that earns higher interest. 

When setting up a sweep account, you’ll choose a specific amount you want to keep in your checking account. Only funds that exceed that amount will be transferred at the close of the business day. That excess amount is transferred to an investment option such as a money market account or a high-interest savings account.

On the flip side, if your checking account balance drops below that level, funds will be transferred back from the investment vehicle to help make sure you have enough money in your checking account to avoid overdrafts.

Both individuals and businesses can set up sweep accounts. 

Sweep accounts can also be used to pay back loans instead of earning interest. The same process applies, except instead of funneling the excess funds into an investment account, the excess money in your checking account will be put toward loan payments. This process can make it easier and faster to pay off debt. If your checking account dips below the preset threshold, though, you will have to pull from a line of credit to replenish the funds since you can’t take your loan payments back.

Types of Sweep Accounts

There are a few types of sweep accounts that you may be able to use whether for your individual finances or your business finances. You can have a loan sweep account, as mentioned above, or one that sweeps money into a money market account. You may also have a sweep account that does both—first, makes a predetermined payment toward a loan or line of credit and then sweeps the excess money into an interest-earning account. For example, the Bank of Utah offers customers six different types of sweep accounts. Consider all of your options for a sweep account before signing up—and make sure you read the fine print.

Pros and Cons of Sweep Accounts

Pros
  • Helps you earn interest on your money

  • Could be used to pay off loans and debt


Cons
  • May come with fees

  • May not be FDIC insured


Pros Explained

  • Helps you earn interest on your money: If you have excess funds just sitting in a checking account, a sweep account allows that money to be transferred into an interest-earning account.
  • Could be used to pay off loans and debt: Rather than having the excess funds transferred to an interest-earning account, you may be able to sign up for a sweep account that sweeps excess money toward loan payments, helping you pay down debt.

Cons Explained

  • May come with fees: If you’re sweeping money from a checking account into a brokerage account, you may have to pay fees for investing that money. Check with your brokerage to understand all of your account fees.
  • May not be FDIC insured: If the money is swept into an investment account, it is not FDIC insured. FDIC insurance only covers money in accounts such as checking, savings, money market, and certificates of deposit (CDs).

Sweep Accounts and Your Money

The main appeal of sweep accounts is that they take a lot of financial management work off your plate and help ensure you’re earning interest on money that is just sitting in an account. Sweep accounts are also usually liquid (unless you’re using them to repay a loan) which helps keep your money accessible. 

The convenience of sweep accounts is especially ideal for busy business owners who don’t have time to constantly monitor their checking account so they know when to move funds. A sweep account is an easy way to make your money grow without having to add another to-do to your list. 

Of course, there are some downsides to sweep accounts. Primarily, if you need to move money back into a checking account from a sweep account, there may be delays that lead to cash-flow challenges. You may also have to pay fees, which could end up being higher than the interest you earn, especially if you incur penalties from withdrawing funds early from certain interest-bearing accounts (like a CD).

Both individuals and business owners will want to monitor how much they’re spending in order to actually benefit from having a sweep account. 

Key Takeaways

  • A sweep account moves excess funds between a checking account and a higher interest-earning account.
  • This transfer happens at the end of every business day when there is an excess amount of funds available. If there is no excess, the money is not swept into the other account.
  • Sweep accounts may also be used to make loan payments instead of earning interest.