What is a cash management account?

A cash management account combines some aspects of checking and savings accounts with features such as competitive yields and little to no fees. Cash management accounts generally are designed for people with large cash holdings they want to keep safe but easily accessible.

What is a cash management account?

A cash management account is an alternative to a traditional checking or savings account, which is offered by brokerage firms and robo-advisors. They help customers keep large sums of money secure and easy to access, while also paying some interest.

Each cash management account is unique, but you often get easy access to your funds in the form of a debit card and/or checkbook. These accounts typically sweep your cash into one or more accounts at partnering banks where your money is eligible for Federal Deposit Insurance Corp. (FDIC) insurance. Your account provider will disclose which banks it partners with although these may change over time.

How cash management accounts work

Cash management accounts keep your money safe and pay interest by dividing your deposit into multiple accounts at different banks. For example, if you deposit $1 million into a cash management account, the brokerage might put sums of $200,000 in accounts at five different banks.

Distributing the cash among the five banks enables all of your $1 million to be insured — rather than just $250,000 of it, which is the standard FDIC insurance coverage limit per FDIC-insured bank, per depositor, per ownership category.

When you deposit or withdraw money, your custodian directs funds or removes funds from the different accounts as needed so all your money remains insured.

Pros and cons of cash management accounts

Pros

There are often various benefits to using a cash management account:

• FDIC protection: For consumers with large balances, cash management accounts make it easy to keep money safe by offering FDIC insurance on balances of up to $1 million or more, after the funds arrive at a program bank. In the interim, funds may be secured by the Securities Investor Protection Corp. (SIPC).
• Some have above-average interest rates: Most cash management accounts pay higher annual percentage yields (APYs) than traditional checking and savings accounts at many banks. While you might find higher rates at some banks, cash management accounts offer much of the flexibility of checking accounts, which often don’t pay interest.
• Easy investment: Cash management accounts are frequently provided by brokerage firms, and most make it easy to use the money in your cash management account to invest — a nice perk if you frequently buy and sell securities.
• Flexibility: Cash management accounts usually make it easy to withdraw your funds. Many offer debit cards you can use to withdraw cash at ATMs or make purchases, and some allow for check writing.

Cons

Consider the potential downsides before opening a cash management account:

• Better rates may be found elsewhere: If you have a large cash balance, you want to earn the best possible interest rate to maximize earnings and reduce the impact of inflation. Some online savings accounts offer better interest rates than cash management accounts. You may also earn a higher yield on low-risk or risk-free products like CDs and short-term investments like U.S. Treasury bills.
• Lack of certain features: Most banks offer features like bill pay to checking account customers. Many cash management accounts don’t have some of these useful money-management features, so they might not be a suitable replacement for a traditional checking account.
• May only be available online: Some cash management accounts are offered by online-only institutions. If you prefer banking in person, a cash management account might not be right for you.
• Not necessary for some people: A key feature of a money management account is the ability to insure funds in excess of the FDIC’s typical $250,000 limit. But most consumers don’t have that much cash on hand, making the perk unnecessary.
• Fees and minimum balances: Some companies that offer cash management accounts charge monthly fees or require high minimum balances.

Cash management accounts vs. other accounts

Here are some basic ways cash management accounts compare to other commonly held accounts:

• Checking accounts: Some cash management accounts are similar to checking accounts, allowing you to write checks, use a debit card and make ATM withdrawals. Cash management accounts tend to pay higher interest than checking accounts, many of which earn no interest at all.
• Savings accounts: Savings and cash management accounts can both earn competitive interest rates. But there are some big differences: A savings account generally limits your transactions to six per month, whereas a cash management account may allow for more. Some cash management accounts also allow for check writing, while savings accounts do not.
• Money market accounts: Cash management and money market accounts both may require high minimum balances. Both types of accounts can be insured by the FDIC, yet a cash management account may be covered up to more than the standard $250,000.

Is a cash management account right for you?

Ask yourself these questions if you’re considering opening a cash management account:

• Do you do most of your banking online? Cash management accounts often come from online-only institutions, so you may need to be comfortable with online banking to use one.
• Do you use tools like online bill pay or peer-to-peer transfers? Some cash management accounts lack these features, so you may be required to stick to a traditional checking account for these options.
• How much cash do you keep on hand? Cash management accounts are best for consumers with large cash balances that exceed FDIC insurance limits. If you keep large amounts of money in your checking and savings accounts, a cash management account might be a good choice.

The best cash management accounts

Here are some details on various cash management accounts:

Bottom line

The main advantage of a cash management account is likely that it allows for higher FDIC insurance limits than a standard savings account. This can make cash management accounts a good choice for anyone who has more than $250,000 in savings. It pays to compare a cash management account with standard savings and checking accounts, to find the one with the highest APY and that has all of the features you’re seeking.