His IRA Could Sit on $140,000 in Low-Yield Cash While a Nearby Fund Pays 4.3% — and the Broker Won’t Point It Out

When a retiree leaves a six-figure sum in the default cash position at a major brokerage, the firm can quietly capture the spread between what it pays and what the market offers. The account statement, meanwhile, may not make clear how much income is being left behind.

A 64-year-old is preparing to move a long-held 401(k) into an IRA at a large brokerage before retirement, and he wants to keep $140,000 in cash as a cushion for the first years of withdrawals. Once the rollover is completed, that money will likely land in the brokerage’s default sweep account, which pays 0.05%, even though a money market fund on the same platform is yielding about 4.3%. The firm is not required to highlight that difference.

This happens often. Rollovers, fund sales, bond maturities, and dividends all create cash, and brokerages usually place it in a sweep account automatically. Many new retirees want cash reserves, but they often end up in the sweep by default rather than by choice.

Why Sweep Programs Have Faced Lawsuits

The gap has attracted legal scrutiny as a series of class actions accused large brokerage firms of profiting from sweep programs. According to an analysis by the law firm Sheppard Mullin, the lawsuits claimed firms did not adequately disclose that customers could earn more by moving cash into other accounts or into cash alternatives such as money market funds. Merrill Lynch, Wells Fargo, LPL, and other brokerages have faced suits over sweep rates. The firms earn more on swept deposits than they pay customers, and the difference becomes revenue.

Rates have also shifted in the fall. The Federal Reserve raised the upper end of its target range to 4% from 3.75%, and recent coverage has highlighted money market funds as a straightforward way to benefit from higher rates. Default sweep rates generally lag those moves.

What 0.05% Means on $140,000

At 0.05%, $140,000 generates about $70 a year. At 4.3%, the same amount brings in roughly $6,020, leaving a gap of about $5,950 annually. If the full balance remained there and compounded for 10 years, the shortfall would widen to around $72,600. A retiree drawing down the cash reserve would lose less than that, but the sweep still gives up nearly $6,000 a year.

Nearly every common benchmark does better than the sweep by a wide margin. Treasury bill yields range from 4.0% on 4-week bills to 4.5% on 52-week bills. Even the national average 12-month CD, which is a low bar, pays 1.8%.

IRA Tax Rules Make the Difference Larger

Money inside a traditional IRA is not taxed until it is withdrawn. Under 26 U.S.C. § 408(e)(1), the account itself is exempt from taxation. In a taxable account, money market interest is taxed each year as ordinary income. Inside an IRA, the full yield compounds. Moving money from the sweep into another fund within the IRA counts as an internal trade, so it does not trigger tax.

Withdrawals are counted as gross income regardless of how the cash was invested. In other words, the choice of cash vehicle has no tax impact when the money comes out. Required minimum distributions start at age 73, which can make a cash reserve even more useful for covering forced withdrawals.

Two Ways to Put the Idle Cash to Work

Option One: A Government Money Market Fund

This is often the simplest choice for people in this situation. A government money market fund holds Treasury bills and similar short-term securities, so its yield tends to move with the Fed’s rate. It can usually be sold for cash within a day when a withdrawal is needed, and the yield is variable, so income falls if the Fed cuts rates. These funds are not FDIC-insured, but they are backed by short-term government debt.

Option Two: A Treasury Bill Ladder

Retirees with a set withdrawal schedule can buy Treasury bills that mature when they need cash. The 26-week bill yields 4.4% and the 52-week bill 4.5%, which allows rates to be locked in for a fixed period. The drawback is upkeep: when bills mature, the proceeds go into the sweep account, where they can sit at 0.05% until they are reinvested.

Some retirees keep only a small balance in the sweep to cover fees, and moving that cash into an average bank CD leaves most of the available yield on the table.

What to Review Before the Next Statement

1. Find the sweep rate. Review the cash line in the IRA and the brokerage’s cash disclosures, because firms often use different rates by balance tier, and the default tier is usually the lowest.
2. Compare reserve options. Some retirees keep a small amount in the sweep for fees and move the rest into a money market fund or a Treasury bill ladder. On a $140,000 reserve, that one change can matter more than most fee comparisons.
3. See whether the default can be changed. Some platforms let a money market fund serve as the account’s core position, so dividends and maturities no longer land at 0.05%.
4. Check again after each rollover or maturity. New cash typically returns to the sweep by default. Many people mistakenly assume that the word “cash” on a statement means market-rate earnings.