What Is a Sweep Account?

Q: What is the risk of a sweep account?

There are some risks associated with sweep accounts. One is that your sweep account or brokerage account might charge fees. The second is that your checking account balance could dip too low if you have a high-spend month, racking up overdraft fees or making it difficult to pay your bills. While it may be possible to return swept funds to your original accounts, the transfer could take a few days and may not cover an immediate gap in cash flow.

Q: Can I withdraw money from a sweep account?

A sweep account is generally a checking account that you can withdraw money from at any time. If your excess funds are swept into an external account, you’ll need to check that account’s rules to find out about withdrawals. For instance, sweeping money into a CD means that you have to keep that money in the CD until it matures unless you want to pay a penalty. If you sweep money toward loan payments, you usually can’t get that money back from your creditor.

Q: How much interest does a sweep account pay?

A sweep account is a checking account that transfers excess funds into another account of your choice. You might sweep money into a high-yield savings account, money market account, CD, or another investment account. Your interest earnings will vary by account type.

Rebecca SafierUpdated July 30, 2023

Share this article:

Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

A sweep account is a type of bank or brokerage account that automatically transfers money into an account with a higher earnings rate at the end of each business day. That high-interest account is often a high-yield savings account, money market account, or other brokerage account. You can also use a sweep account to automatically put excess funds in your checking account to put toward paying down debt. Read on for a closer look at sweep accounts, including how they work and their pros and cons.

Definition of a Sweep Account

A sweep account is a type of account that automatically transfers excess funds to another account at the end of each business day. People often set up sweep accounts to maximize their interest earnings. With a sweep account, you can set a maximum balance for your checking account. If you have extra money in your account at the end of the day, it will get “swept” into a higher interest-earning account, such as a high-yield savings account or money market account. If there’s no excess money in your account, nothing will get transferred. Let’s say, for example, that you set a maximum amount of $4,000 for your checking account. If you have $5,000 in your account at the end of the day, the extra $1,000 will automatically transfer into another designated savings or investment account, where it has the potential to earn more interest and grow over time.

How Does a Sweep Account Work?

Sweep accounts automate transfers between your bank account and another account so you don’t have to make them manually. You’ll set a certain maximum for your checking account balance and allow your sweep account to transfer any excess amount to an account of your choice. You might designate an internal or external account to receive your swept money. For instance, you could sweep it into a high-yield savings account at your same bank or sweep it into an external money market or other investment account. If your checking account balance drops too low, your sweep account may also be able to automatically transfer some of the funds back into it to ensure you don’t rack up overdraft charges. Some sweep accounts also have the option of putting excess money toward paying down loans. By making extra payments on your loans, you could get out of debt faster and save money on interest. However, before paying off your loan entirely, it’s always best to make sure the lender does not charge prepayment penalties, which could negate the savings on interest.You may also be able to split the difference by putting part of the excess money into a savings or investment account and the rest toward debt payments. Keep in mind, though, that you can’t take back any funds that you put toward loans, so make sure your checking account balance doesn’t fall too low.

Examples of Sweep Accounts

There are two main types of sweep bank accounts: personal and business. Personal accounts are designated for individual investors who want to earn more from their excess funds by sweeping them into a high-interest account.Business sweep accounts are designed for small businesses that want to maximize their earnings on available cash reserves. Businesses can similarly set a minimum balance for their checking account and have the rest automatically transferred into a high-yield account. The sweeps usually happen at the end of each business day. If you need any funds returned, though, that transfer might take a few days. Besides money market and high-yield savings accounts, you may also be able to sweep funds into a certificate of deposit (CD). Just keep in mind that most CDs charge a penalty if you try to withdraw funds before the CD reaches maturity. Recommended: Business Bank Account vs Personal Bank Account

Pros of Sweep Accounts

Here are some of the benefits of setting up a sweep account:

Earn more interest on your money. Checking accounts don’t earn much interest — the average rate is just 0.07%, according to the Federal Deposit Insurance Corporation. By sweeping your excess funds into a high-yield savings or investment account, you have the potential to earn more interest on your account and grow your balance over time.
Pay down debt more quickly. You may also be able to use a sweep account to put excess funds toward loan payments. Accelerating debt repayment can save you money on interest and potentially build your credit score.
Automate the savings process. A sweep account is designed to transfer money automatically, eliminating manual legwork. After setting your maximum checking account balance and designating an internal or external account, you can let your automatic sweeps take care of the rest.

Cons of Sweep Account

Along with the benefits of sweep accounts, there are some potential disadvantages to consider:

May charge fees. Depending on your institution, your sweep account or external brokerage account may come with account fees. Read the fine print so you understand any associated fees that could cut into your earnings.
Returning funds can take a few days. It may be possible to have funds returned to your original account if your balance dips too low, but the transfer probably won’t happen instantly. Depending on your destination account, the funds may also not be immediately liquid (for instance, a CD may charge a penalty for withdrawing funds before the maturity date).
External accounts may not be FDIC-insured. While deposit accounts at banks are typically FDIC-insured for up to $250,000, investment accounts may not be.

The Takeaway

Sweep accounts offer a strategy for automating your savings and earning more in interest. They transfer excess funds from your checking account into a higher-yield account of your choice, whether it’s a high-yield savings account, money market account, or other investment vehicle. While you may prefer this “set it and forget it” approach, keep a close eye on any fees that could reduce your earnings. You also may need to be careful with spending to ensure your primary checking account balance doesn’t drop too low. Explore high-yield savings accounts with Lantern by SoFi today!

Frequently Asked Questions

What is the risk of a sweep account?

Can I withdraw money from a sweep account?

How much interest does a sweep account pay?

Photo credit: iStock/Sorapop

LCBK0423008

About the Author

Rebecca Safier

Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).

Share this article: