Money is not just a commodity. It represents security. If you manage it carefully, your future life will be much easier. Where you put your money is almost as important as earning it. This is where brokerage accounts, retirement accounts, checking accounts, and savings accounts come into play.
What are the differences between these accounts? Understanding the best places to keep the money you’ve worked hard for is essential. When deciding where to store your savings, knowing which accounts can protect your funds is crucial for making the best decision.
A brokerage account is an investment account. It allows you to buy and sell securities, including stocks, bonds, and mutual funds. A bank account does not hold securities, it only holds cash deposits.
Brokerage accounts typically generate interest on the cash not used for investments, which may come with risks but generally offer higher returns than bank savings accounts.
A bank savings account is where you keep your cash reserves. It pays an annual percentage yield (APY) with typically lower returns. It is usually a safe and stable place to store your funds.
With a bank checking account, you can pay bills, shop, and use ATMs. If you wish to invest, you can also transfer funds to a separate account.
A brokerage checking account functions similarly to a bank checking account. You can pay bills and use ATMs. The difference lies in the ability to directly invest without transferring funds as they are already with the brokerage firm, allowing for direct securities purchases.
Unlike banks, the opening and maintenance fees for brokerage checking accounts are typically minimal.
Brokerage firms keep uninvested funds in one or more banks insured by the Federal Deposit Insurance Corporation (FDIC). This means that once your funds are moved to the bank, they are insured. The upside is that with multiple banks in use by the brokerage firm, you may even receive additional insurance.
One advantage of depositing funds into a brokerage checking account is the convenience it offers for investing. However, the interest rates on brokerage checking accounts are generally lower than other deposit accounts. It may not be suitable for everyone. Consult a financial advisor to determine if it’s the right fit for you.
You may have heard of a “Cash Management Account” (CMA). This term can be interchangeable with a “Cash Account.” A CMA may be linked to an investment account.
A CMA is a non-bank account typically managed online. It is offered solely by brokerage firms, serving as an alternative to traditional bank accounts.
While brokerage accounts can earn from market performance, CMAs do not.
Providers do not keep funds in CMAs. When you fund a CMA, providers place the funds in various banks known as “program banks” where your money can earn interest.
Program banks are usually FDIC-insured. Funds held by the brokerage firm before being transferred to program banks are not covered by the FDIC. However, there is another form of protection.
The Securities Investor Protection Corporation (SIPC) oversees protection provided by brokerage firms. It is a non-profit, membership-based corporation established under federal regulations. Unlike the FDIC, SIPC is not a government agency.
SIPC supervises the liquidation of member companies. Liquidation may occur due to bankruptcy, financial difficulty, or loss of customer assets.
SIPC offers up to $500,000 of protection for securities and cash per customer, with a $250,000 limit on cash. For example, if you have $200,000 in securities and $300,000 in cash, you exceed the $250,000 cash limit by $50,000, leaving you with $200,000 in securities and $250,00…
Customers can only file claims against the brokerage firm for their “net equity.” This is the value of a customer’s cash and securities owed by the brokerage firm minus any debts owed to the firm.
This protection applies only to cash and securities. This means commodity futures are not included. Protection also applies only to individual accounts. Retirement accounts are considered individual accounts, so a total of $500,000 in securities and $250,000 in cash could be covered. Beneficiaries don’t benefit from protection.
If you’re looking to invest in securities, a brokerage checking account is convenient. Your checking account is there, and you don’t have to spend time transferring investment funds.
However, there may be gaps between your brokerage firm holding your funds and transferring them to FDIC banks. If you have a diverse investment portfolio, this may leave you without some SIPC coverage.
Discuss the pros and cons with your financial advisor to make informed decisions.
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