High-Yield Cash Management Accounts
Cash sitting idle in brokerage accounts and checking accounts often earns little to no interest. Major banks pay 0.01% to 0.10% APY on checking balances, while some brokerage sweep accounts yield similarly poor returns. Cash management accounts (CMAs) and high-yield sweep options offer an alternative, providing yields of 3.00% to 5.00% APY on uninvested cash.
Understanding how these accounts work, their insurance coverage, and their limitations helps investors capture yield without sacrificing liquidity or safety.
How Brokerage Cash Sweeps Work
When you sell securities or receive dividends in a brokerage account, the cash lands in a "sweep" vehicle. Sweep destinations vary by brokerage:
Bank sweep programs: Cash sweeps into one or more partner banks, earning a set interest rate. The banks use these deposits to fund their lending activities. Yields depend on the arrangement between the brokerage and partner banks.
Money market fund sweeps: Cash automatically purchases shares of a money market mutual fund. These funds invest in short-term government securities or commercial paper and pay yields reflecting current money market rates.
Government fund sweeps: A subset of money market sweeps that invest exclusively in Treasury securities and government-backed instruments.
The sweep mechanism matters because it determines both yield and insurance coverage.
FDIC Insurance Limits and Extended Coverage
Standard FDIC insurance covers $250,000 per depositor, per insured bank, per ownership category. For a joint account, coverage extends to $500,000 ($250,000 per co-owner).
Several CMAs extend FDIC coverage beyond $250,000 through multi-bank sweep networks. Cash deposits spread across multiple partner banks, with each bank providing up to $250,000 in coverage. For example:
- Wealthfront Cash Account: Sweeps to partner banks, providing FDIC insurance up to $8 million for individual accounts ($16 million for joint accounts) through its network of program banks
- Betterment Cash Reserve: Offers up to $2 million in FDIC insurance ($4 million for joint accounts)
- SoFi Checking and Savings: Provides up to $3 million in FDIC coverage through partner bank network
These extended coverage amounts suit high-net-worth individuals holding significant cash positions. For most households, the standard $250,000 limit suffices for emergency funds and short-term cash needs.
Platform Comparison: Major Brokerages
Fidelity
Fidelity offers multiple cash options:
Fidelity Government Money Market Fund (SPAXX): The default sweep for most accounts, currently yielding approximately 4.95% (7-day yield as of late 2024). This is a money market mutual fund, not FDIC-insured, but invests in government securities with minimal credit risk.
Fidelity Cash Management Account: A separate account type functioning as a checking account with bill pay and a debit card. Uninvested cash sweeps to the money market fund. FDIC insurance up to $5 million available through partner banks for deposits held in the Fidelity FDIC Insured Deposit Sweep Program.
Fidelity's money market yields consistently rank among the highest in the industry, making it an attractive option for investors comfortable with money market fund risk.
Charles Schwab
Bank Sweep: Schwab's default sweep deposits cash into Schwab Bank and affiliated banks. The yield on the Schwab Bank Sweep has historically lagged competitors, often by 1% or more. As of late 2024, the Bank Sweep pays approximately 0.45% APY—significantly below money market alternatives.
Schwab Value Advantage Money Fund (SWVXX): Investors can change their sweep election to this money market fund, currently yielding approximately 5.10%. This change requires manual selection in account settings.
Schwab Intelligent Portfolios Cash Allocation: Schwab's robo-advisor holds a portion of portfolios in cash sweep, generating revenue for Schwab. This has drawn criticism for the opportunity cost compared to invested alternatives.
The gap between Schwab's default sweep and its money market fund makes active selection important for Schwab clients.
Wealthfront
Cash Account: Currently yields approximately 4.00% to 4.50% APY (rates adjust with Fed policy). FDIC-insured through partner banks, with coverage up to $8 million for individuals. No minimum balance, no fees.
Investment Account: Uninvested cash in the investment account sweeps to money market funds. Wealthfront's cash management primarily centers on the separate Cash Account rather than brokerage sweep.
Wealthfront positions its Cash Account as a high-yield savings alternative with brokerage integration, allowing easy transfers between cash and investment accounts.
Vanguard
Federal Money Market Fund (VMFXX): Default sweep for most Vanguard accounts, currently yielding approximately 5.25%. Government securities backing provides high safety without FDIC insurance.
Vanguard Cash Plus Account: Offers FDIC insurance up to $1.25 million through partner banks, with yields typically lower than the money market fund option.
Vanguard's money market yields compete well, though the platform offers fewer checking-account-style features than some competitors.
Money Market Funds vs. FDIC-Insured Deposits
The choice between money market fund sweeps and FDIC-insured bank sweeps involves trade-offs:
Money market funds:
- Currently offer higher yields (often 0.50% to 1.00% more than bank sweeps)
- Invest in government securities with near-zero credit risk
- Not FDIC-insured, but money market funds have rarely "broken the buck"
- SEC regulations require high liquidity and short maturities
FDIC-insured deposits:
- Government guarantee regardless of bank solvency
- Yields often lower due to bank economics
- Coverage limits require attention for large balances
- Psychologically reassuring for conservative investors
For most practical purposes, government money market funds offer sufficient safety. The 2008 Reserve Primary Fund failure remains the only notable money market fund to break the buck, and it invested in commercial paper (not government securities). Government money market funds avoided that fate.
Investors prioritizing absolute certainty of principal should opt for FDIC coverage. Those comfortable with minimal money market risk can capture additional yield.
Tax Implications
Interest from CMAs and money market funds is taxable as ordinary income. There is no preferential rate treatment, unlike qualified dividends or long-term capital gains.
For investors in high tax brackets, the after-tax yield difference between a 4.50% CMA and a 4.00% CMA may be smaller than it appears:
- 4.50% at a 32% federal tax rate = 3.06% after-tax
- 4.00% at a 32% federal tax rate = 2.72% after-tax
The 0.50% pre-tax difference becomes 0.34% after-tax. Still meaningful on large balances, but not as dramatic as headline rates suggest.
Treasury money market funds offer partial tax relief. Interest from Treasury securities is exempt from state income tax, adding value for residents of high-tax states. A Treasury fund yielding 4.25% may effectively match a 4.50% prime fund after considering state tax savings.
When to Use Cash Management Accounts
CMAs serve several portfolio functions:
Emergency funds: The high yields and easy access make CMAs suitable for emergency reserves, though traditional HYSAs offer similar rates with potentially simpler interfaces.
Dry powder for investing: Cash waiting for investment opportunities earns competitive yields rather than sitting idle. This matters for investors who accumulate cash before deploying into markets.
Short-term savings goals: Money needed within one to three years should not be exposed to stock market volatility. CMAs provide yield while preserving principal.
Operating cash for active traders: Frequent traders may hold significant cash between positions. Higher sweep yields reduce the opportunity cost of cash positions.
Platform Selection Criteria
When choosing among CMAs, consider:
Current yield: Compare 7-day yields across platforms, recognizing rates change with Fed policy.
FDIC coverage needs: Large cash positions require multi-bank sweep programs or distribution across multiple institutions.
Account integration: Investors with existing brokerage relationships may prefer keeping cash with the same institution for simplified transfers and consolidated reporting.
Features: Bill pay, direct deposit, debit cards, and mobile check deposit matter for accounts used for daily transactions.
Yield history: Some platforms maintain competitive rates consistently; others offer promotional rates that decline after initial periods.
Monitoring and Maintenance
Cash management requires ongoing attention:
Rate tracking: When the Federal Reserve adjusts rates, CMAs follow—but not always immediately or proportionally. A platform paying top rates today may lag competitors in six months.
Sweep election review: Ensure your default sweep remains optimal. Brokerages occasionally change options or add alternatives worth considering.
Balance management: For FDIC-insured accounts, monitor balances against coverage limits. Amounts exceeding insurance should be distributed across institutions.
Tax reporting: CMAs generate Form 1099-INT reporting for interest earned. Track this income for tax filing purposes.
Checklist for Cash Management Optimization
- Identify your default sweep option and compare its yield to available alternatives at your brokerage
- Verify FDIC or SIPC coverage limits and confirm balances stay within protected thresholds
- Compare yields across three to five platforms before selecting a CMA for significant cash holdings
- Set up automatic sweeps or transfers to ensure cash earns competitive yields immediately upon receipt
- Review rates quarterly and move cash if your current platform falls behind competitors by more than 0.50%