Charles Schwab Cash Sweep Options
One of the biggest mistakes you can make today is to let your cash sit on the sidelines. This isn’t to disparage strategic cash reserves used to plan against a further market downturn to dollar-cost average into planned stock positions.
Instead, this is to decry holding cash as a strategic asset itself.
As Ray Dalio often asserts, “cash is trash.” Today, though, the why behind that statement is different than when he first coined it. Rather than cash being a comparatively poor performing asset class compared to booming stocks or fixed-income bonds.
Instead, ongoing inflation means holding cash today is the same as burning it for warmth. With national inflating holding steady at over 8%, cash is a losing asset.
There is some good news in today's choppy economy. In a pre-recessionary environment, the Federal Reserve uses rate increases to tamp inflation. And, with higher Fed rates comes cash's saving grace – an increased yield on cash sweep accounts.
What is a Cash Sweep Account?
In short, rather than actively managing cash inflows and outflows from a savings account, a cash sweep account automatically moves (or sweeps) uninvested cash into an account that's safe and has a higher yield than letting it sit dormant.
Charles Schwab Cash Sweep Accounts
Charles Schwab, one of the industry leaders in no and low-fee personal brokerages, gives investors access to various options to increase the return on cash positions. One of the most popular is their cash sweep account. Several options are available depending on your account type and personal preference.
While specifics vary between types of cash sweep accounts, most have these features in common:
- You decide whether you’d like to participate in cash sweep benefits.
- The cash sweep does not affect your account liquidity. You won't have to wait for deposits or withdrawal periods between your investment and cash sweep accounts. It's essentially the same as having cash on hand, although the background mechanics are a bit more complicated.
- The cash sweep earns interest beyond what you'd get if the money were left dormant in the investment account.
Schwab Bank Sweep
This standardized cash sweep account is what investors can access when opening a standard brokerage account. When you use the bank sweep feature, your cash is swept into an account with a bank affiliated with Schwab.
Because the money is deposited with a bank, this plan guarantees FDIC insurance. The federal government insures reimbursement of your cash up to $250,000 in the unlikely event that the bank collapses.
To provide even more reassurance, Schwab is transitioning its bank sweep benefit to a multiple bank version. This increases security and reduces risk, as cash sweeps are distributed amongst several affiliated banks. Cash amongst multiple banks guarantees the $250,000 FDIC insurance benefit for each, so accounts with large cash stockpiles and sweeps enjoy added security.
With bank sweep benefits, your cash is compounded daily and deposited monthly on the 15th (or the next business day).
While interest rates can vary depending on the total amount of cash, with more significant sums
gathering more interest, money in a bank sweep account yields 0.4% annually.
Schwab Benefit Plan Sweeps
If you're self-employed or a small business owner, Schwab offers competitive benefit plans to help save for your retirement in place of a sponsored 401(k) or similar retirement plan.
Much like the standard bank sweep plan, your uninvested cash is swept into one or more affiliated banks with FDIC insurance and there are no associated fees or expenses for using the benefit. There is also no impact on your liquidity, so you can still buy new investments within your benefit plan using cash in the sweep account.
Right now, the interest rate is also 0.4% annually for benefit plan sweeps.
Schwab Money Fund Sweeps
If your account is eligible and you're willing to sacrifice FDIC insurance for a higher yield, Schwab offers money fund sweeps. Rather than sweeping uninvested cash into an affiliated bank account, the money fund sweep moves the cash into a Schwab-managed money market account called SWGXX. Right now, SWGXX yields 2.53%.
Unfortunately, access to money fund sweeps is restricted to specific account types:
- Schwab Managed Portfolios. As the name implies, this portfolio is managed by Schwab employees on your behalf and is best for investors who do not want to manage their investments actively.
- Schwab Charitable Accounts.
- Some retirement accounts – the rules for retirement accounts can be complicated, so check with a Schwab representative to see if yours qualifies.
Although the cash sweep is only available to these accounts, any account holder with Schwab can invest in SWGXX to enjoy a greater cash yield without the added benefit of automatic deposits of uninvested cash.
Schwab Intelligent Portfolios
Schwab's Intelligent Portfolio feature is like their managed accounts. Instead of a live manager, the Intelligent Portfolio is an AI-driven robo-advisor service. It automatically allocates investments and develops strategies based on age, risk tolerance, and other factors.
Schwab's Intelligent Portfolios have a cash allocation enrolled in the SWGXX fund yielding 2.53%.
For both standard money fund sweeps and those in a Schwab Intelligent Portfolio, interest rates are set on the first business day of the month and may change from month to month.
Comparison
Majority of brokerage firms offer very low interest on investors' uninvested cash. TD Ameritrade's
cash sweep rates, for example, are 0.3%.
Robinhood offers the industry's highest rate of
3.75% APY
on free cash balances.
It is available with the Robinhood Gold package that costs only $5 per month.
M1 Finance
offers a checking account that comes with 3% APY.
However, that checking is part of the broker's
M1 Plus program, which costs $125 a year.
Other Cash Investing Options From Schwab
Suppose money sweeps don't interest you (pun intended). In that case, Schwab offers additional options to generate a little extra income from your cash rather than let inflation reduce its value. In addition to investor access to SWGXX and similar money market funds, Schwab offers:
High Yield Checking Account
While you must have a standard investment account to open a high-yield checking account (HYCA), you
can quickly transfer money between the two without relying on sweeps. The HYCA is FDIC-insured and
comes with a debit card and other standard checking account benefits. The HYCA currently has an
interest rate of 0.4%.
High Yield Savings Account
High-yield savings accounts with Schwab (HYSA) are similar to the HYCA. Unlike an HYCA, though, they include federal restrictions on withdrawal frequency (six per month). The HYSA currently yields 0.43%.
Certificates of Deposit
Certificates of deposit, or CDs, sacrifice liquidity for higher yield. This means that you cannot cash out a CD until it expires, and terms range from 30 days to several years. The longer you're willing to lock up your cash, the higher the yield. Current rates range from 3.50% to 4.15%.
Charles Schwab Cash Sweep Conclusion
No matter your choice, selecting a sweep account is a necessity in today's inflationary environment. Cash sweeps take the guesswork and legwork out of moving cash in and out of different accounts. Sweeps with Schwab don't sacrifice your liquidity, so your money is as accessible as it was in your pocket.
Don't let your cash be trash. Put it to work for you with a Schwab cash sweep account.
Updated on 10/5/2022.
Arthur Chachuna is professional personal finance blogger, and the owner of Brokerage-Review.com.
He has been an avid investor for 23 years, and has background in both applied math and programming.
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