“How to Earn Interest on Uninvested Cash in Brokerage Accounts”

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What Is a Brokerage Account?

A brokerage account is an investment account that provides access to the stock market. It allows you to trade 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 withdraw funds without penalty, though investment gains are typically taxed. Brokerage accounts can be used for both short- and long-term financial goals.

What Happens to Uninvested Cash in a Brokerage Account?

At any time, you might have uninvested cash in your brokerage account. Many brokerage firms will automatically “sweep” this money into an interest-earning account or other investments. Options vary by brokerage, and interest rates and risk levels can fluctuate.

How to Store Cash in a Brokerage Account

There are several ways to hold cash in a brokerage account, which differ from traditional bank accounts as they are provided through brokerage firms and robo-advisors.

Cash Management Accounts

Uninvested funds in a brokerage account might be swept into a cash management account (CMA). CMAs combine features of checking and savings accounts, allowing for fund transfers, bill payments, and everyday transactions with a linked debit card. CMAs typically have lower fees compared to traditional bank accounts and some offer annual percentage yields (APYs) exceeding 4%.

Money in a brokerage account is insured by the Securities Investor Protection Corp. (SIPC) for up to $500,000. Brokerages and robo-advisors often partner with FDIC-insured banks to provide CMAs, covering uninvested cash up to $250,000 per depositor, per financial institution. For larger amounts, some brokerages spread funds across multiple accounts to keep more cash insured.

Money Market Funds

A money market fund is a type of mutual fund that invests in short-term, low-risk assets like CDs and government bonds. These funds are considered safer investments and can provide income through regular dividend payments. They are particularly attractive when interest rates rise, as dividend payments are linked to short-term interest rates. Some money market funds offer yields exceeding 5%, but they are not insured by the FDIC or SIPC, so there is a risk of losing money.

Pros and Cons of Keeping Cash in a Brokerage Account

Pros

• CMAs are linked to your brokerage account, allowing you to earn interest and reinvest earnings easily.
• Some CMAs offer perks like no account fees and cash back opportunities, in addition to the APY.

Cons

• You may find better APYs elsewhere, such as in high-yield savings accounts with yields greater than 5%.
• Money in money market funds is not insured by the FDIC or SIPC, posing a risk of loss.

Alternate Places to Store Your Cash

High-Yield Savings Accounts

These accounts offer higher interest rates than traditional savings accounts, helping your money grow faster. They are a great place to store your emergency fund or other cash savings, with easy accessibility.

Certificates of Deposit (CDs)

CDs lock your money for a set term, ranging from one month to 10 years. Withdrawing funds early usually incurs a penalty, but holding out can be worthwhile, with some CD rates as high as 5.48%.

Money Market Accounts

Money market accounts are similar to CMAs, earning interest and allowing withdrawals with a debit card or checkbook. However, they may limit electronic withdrawals and transfers to six per month. Current APYs can exceed 5%.

The Bottom Line

Brokerage accounts are not just for stock market investments; they can also help your uninvested cash earn more. APYs and risk levels vary by brokerage firm or robo-advisor. In some cases, storing your cash in a high-yield savings account or other low-risk investment vehicle might be more beneficial.

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