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Interest-bearing accounts come in all shapes and sizes—from savings accounts to certificates of deposit (CDs) to money market accounts. If you invest through a brokerage account, chances are you can also earn interest on uninvested cash as well. Doing so comes with pros and cons, however. If you have cash just sitting in a brokerage account, you may be able to earn some interest on it, but it's wise to first explore your other options. Let's talk about how.
What Is a Brokerage Account?
A brokerage account is an investment account that gives you access to the stock market. It allows you to make trades and invest in stocks, bonds, mutual funds and exchange-traded funds (ETFs). Unlike retirement accounts such as 401(k)s and traditional IRAs, you can tap your funds without penalty, though you'll likely be taxed on investment gains. You can use a brokerage account to save for short- and long-term financial goals.
What Happens to Uninvested Cash in a Brokerage Account?
At any given time, you might have cash in your brokerage account that you haven't yet invested or withdrawn. Many brokerage firms will automatically "sweep" this money into an interest-earning account or toward other investments. Options vary from one brokerage account to the next, and interest rates and risk levels can fluctuate.
How to Store Cash in a Brokerage Account
There are multiple ways to hold cash in a brokerage account. Just keep in mind that they work a little differently from similar accounts you might find at your bank. That's because they're provided through brokerage firms and robo-advisors, not financial institutions.
Cash Management Accounts
Uninvested funds in a brokerage account might be swept into a cash management account (CMA). This type of account has the combined features of a checking and savings account. Account holders can transfer funds and pay bills, and some have a linked debit card that allows for everyday transactions. CMAs typically have lower fees when compared to traditional bank accounts. At the time of this writing, some have annual percentage yields (APYs) that top 4%.
Money in a brokerage account is insured by the Securities Investor Protection Corp. (SIPC) for up to $500,000. Brokerages and robo-advisors typically partner with FDIC-insured banks to provide CMAs—so when uninvested cash is swept into a CMA, it's typically covered for up to $250,000 per depositor, per financial institution. For larger amounts of money, some brokerages will spread your funds across multiple accounts so that more of your cash stays insured.
Money Market Funds
A money market fund is a type of mutual fund that invests in short-term, low-risk assets. That typically includes CDs and government bonds. They're considered safer investments that can provide income via regular dividend payments. They're particularly attractive when interest rates are on the rise because dividend payments are linked to short-term interest rates.
Higher-than-average APYs are a big draw. Some money market funds have yields that currently exceed 5%. One drawback is that money market funds are not insured by the FDIC or SIPC. While risk is on the lower side, it's always possible to lose money.
Find High-Yield Savings Accounts
Pros and Cons of Keeping Cash in a Brokerage Account
- CMAs are linked to your brokerage account. Money in a cash management account can earn interest and be used to purchase more securities through your brokerage account. That allows you to easily reinvest your earnings.
- Some cash management accounts have extra perks. That might include no account fees and cash back opportunities. That's on top of the APY.
- You may find better APYs elsewhere. Some high-yield savings accounts currently have yields that are greater than 5%. If you've got a large chunk of cash, you might secure better returns outside of a brokerage account.
- You could lose money. If your money is swept into a money market fund, that cash won't be insured by the FDIC or SIPC. It's possible to lose money.
Alternate Places to Store Your Cash
- High-yield savings accounts: As the name implies, these accounts offer higher interest rate yields than you'd get from traditional savings accounts. That can help grow your money at a faster clip. Money in high-yield savings accounts will remain easily accessible, making them a great place to store your emergency fund or other cash savings.
- CDs: With a CD, your money is locked up for the length of the CD term. That can range anywhere from one month to 10 years. You'll likely be penalized for withdrawing your funds before then, but holding out could be worth it. Some CD rates are currently as high as 5.48%.
- Money market accounts: In some ways, a money market account is sort of like a cash management account. Both earn interest and allow you to withdraw funds with a debit card or checkbook. However, some money market accounts are limited to six electronic withdrawals and transfers per month. But right now, it's possible to secure APYs above 5%.
The Bottom Line
Brokerage accounts aren't just for investing in the stock market. They can also put your uninvested cash to work, allowing you to earn even more. APYs and risk can vary depending on your brokerage firm or robo-advisor. In some cases, it might make more sense to store your cash in a high-yield savings account or other low-risk investment vehicle.