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Understanding Brokerage Accounts and Cash Management

Welcome to O1ne Mortgage! If you have any mortgage-related needs, feel free to call us at 213-732-3074. In this article, we will explore the ins and outs of brokerage accounts and how to manage uninvested cash within them.

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 to save for both short- and long-term financial goals.

What Happens to Uninvested Cash in a Brokerage Account?

At times, you might have cash in your brokerage account that hasn’t been invested or withdrawn. 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). This type of account combines 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 can offer 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 often partner with FDIC-insured banks to provide CMAs, covering uninvested cash for 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%, though they are not insured by the FDIC or SIPC, posing a potential risk of loss.

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 cash management accounts 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 market funds are not insured by the FDIC or SIPC, posing a risk of loss.

Alternate Places to Store Your Cash

Consider these alternatives for storing 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 currently as high as 5.48%.

Money Market Accounts

Similar to CMAs, money market accounts earn interest and allow withdrawals with a debit card or checkbook. However, they may limit electronic withdrawals and transfers to six per month. Some accounts offer APYs above 5%.

The Bottom Line

Brokerage accounts are not just for stock market investments; they can also help you earn interest on uninvested cash. 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.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you make the best financial decisions!

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