If you've been looking for a place to park your cash that offers better interest rates than a traditional bank account, you may have heard of cash management accounts.
A cash management account is an alternative to a regular checking or savings account, and refers to a type of investment account offered by brokers and investment firms that allows you to hold cash while earning interest on your balance. Let's take a closer look at how they work and how they compare to conventional bank accounts.
How cash management accounts work
Cash management accounts essentially combine the features of a checking, savings, and money market account into one. They allow you to earn interest on your cash balance, write checks or make debit card purchases, and easily transfer funds to and from other investment accounts you may hold with the broker.
Your cash is parked in an account at one or more partner banks carried on the firm's balance sheet. The broker can then invest this pooled cash into conservative investments like money market funds and earn a higher return than a typical bank account pays. A portion of this return is then passed on to you as interest on your cash balance.
Cash management accounts are designed for easy liquidity, so you can withdraw cash as needed with no penalties, much like a checking account. However, they typically don't have ATM access or physical branch locations like banks do.
Interest rates and FDIC insurance
The interest rates on cash management accounts can vary quite a bit between brokers but generally tend to be higher than standard brick-and-mortar bank accounts. Rates currently range from around 3-4% at major brokers.
Cash in the account is eligible for FDIC insurance up to the standard $250,000 limit per individual, per institution. However, larger balances beyond that may not be covered depending on the firm's specific insurance arrangements.
Pros and cons of cash management accounts
Pros
Higher interest rates than standard bank accounts
FDIC insurance on balances
Easy liquidity and access to cash
Integrated with other investment accounts at the broker
Cons
Lack of physical branch access
Limited ATM access (depends on the broker)
Possible loss of FDIC coverage for very large balances
Cash management accounts can be a great option to get a better return on your idle cash while still having it be highly liquid and secure. Just be sure to pay attention to the specific interest rates, insurance coverage, and accessibility details for the account you choose. For larger sums, you may still want to use a combination of bank and brokerage cash accounts.