Choosing a Brokerage Checking Account Over a Savings Account

US dollar banknotes show in Istanbul, Turkey on Dec. 7, 2021. (Ozan Kose/AFP via Getty Images)

Money isn’t just a material commodity; it represents safety. If you protect and build your nest egg, life goes a lot easier down the road. Where you keep your money is almost as important as earning it. That’s where brokerage, retirement, checking, and savings accounts come into play.

What are the differences between these accounts? Knowing which ones are the best place to keep your hard-earned dollars is imperative. But knowing which accounts protect your funds is vital to deciding the best course of action when deciding where to keep your savings.

Brokerage Account vs. Bank Savings Accounts

A brokerage account is an investment account. It allows you to buy and sell securities. These include stocks, bonds and mutual funds. A bank account doesn’t hold securities; it only holds cash deposits.

Brokerage accounts often sell assets on a rolling basis, so you may earn interest on uninvested cash. It could have risks, but the yields are usually higher than a bank savings account.

A bank savings account is a place to hold cash reserves. It pays out an annual percentage yield (APY) and usually has a low return. It’s usually a safe and stable place to park your money.

Opening a Brokerage Checking Account vs. Bank Checking

With a bank checking account, you pay bills, make purchases and use an ATM. You also can transfer funds to a separate account if you want to invest.

The brokerage checking account has the same features as a bank checking account. You can pay your bills and use an ATM. The difference is you'll have the accessibility of investing. You don’t have to transfer funds; it’s already at the brokerage, ready to buy securities.

Unlike a bank, a brokerage checking account often has minimal fees to open and maintain.

And brokerages hold uninvested funds in one or more Federal Deposit Insurance Corp. (FDIC)-insured banks. This means that money you haven’t invested is insured once transferred to the bank. The plus side is you may be able to gain additional insurance coverage if the brokerage uses more than one bank.

The upside to having your funds in a brokerage checking account is that you can conveniently invest. But brokerage checking accounts often offer lower interest rates than other deposit accounts. It might not be a fit for everyone. Check with a financial advisor to determine if it’s right for you.

Brokerage Account vs. Cash Management Account

You may have heard the term “cash management account” (CMA). This is often interchangeable with “cash account.” A CMA can be linked with an investment account.

A CMA is a non-bank account and is usually managed online. It is provided only by a brokerage, also called a provider, and is an alternative to traditional bank accounts.

A brokerage account earns money from market performance, but a CMA does not.

The provider doesn’t keep the money in a CMA. When you fund your CMA, the provider parks the monies in various banks called “program banks.” It is at these banks that your money earns interest.

The FDIC usually insures the program bank. When your funds are sitting with the brokerage before they are transferred to a program bank, they are not covered by the FDIC. But there is another protection.

Brokerage SIPC vs. Bank FDIC Protection

The FDIC is an agency of the U.S. government that protects deposit losses if an insured bank fails. It has blanket coverage of $250,00 per depositor per insured bank. Protection also provides separate coverage for deposits held in different “ownership categories”.

Participating brokerage firms’ protection comes under the Securities Investor Protection Corp. (SIPC). It is a nonprofit membership corporation established by federal statute. But the SIPC is not a regulator. And unlike the FDIC, the SIPC is not an agent of the United States.

The SIPC oversees the liquidation of member firms. Liquidation could be caused by bankruptcy, financial trouble or missing customer assets.

The SIPC protects each customer up to $500,000 for securities and cash. This includes a $250,000 limit for cash only. For example, if you have $200,000 in securities and $300,000 in cash, you will be out the excess $50,000 in cash. Only the $200,000 in securities and $250,000 in cash will be protected.

Customers can only file claims against the brokerage firm for the customers’ “net equity”. This is the value of cash and securities owed by the brokerage firm to the customer, minus the indebtedness that the customer owes the firm.

Protection is only available for cash and securities. That means commodity futures are not covered. Protection is also only available for individual accounts. A pension fund is an individual account; therefore only receives the total $500,000 for securities combined with the $250,000 for cash. Therefore, individual beneficiaries do not receive protection.

Brokerage Checking Accounts vs. Traditional Checking Accounts

A brokerage checking account is convenient if you want to invest your money in securities. Your checking account is there, and you don’t have to take the time to transfer investment funds.

But there might be a gap between your brokerage holding your funds and transferring them to an FDIC bank. If you have an extensive enough portfolio, this could leave you without some SIPC coverage.

Discuss the advantages and disadvantages with a financial advisor so you can make an informed decision.

The Epoch Times Copyright © 2023 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.