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A sweep account and an IRA

Question: I am 24 years old and starting to get a handle on my financial situation. I have started an emergency savings account and am ready to open a Roth IRA with $2,500. I started an application for an account, but it asked for my choice of a sweep fund. Nothing I've read has mentioned this and my Internet research has come up with limited and confusing information. What is a sweep fund and how do I choose one? Julia, Boise, ID

Answer: You're certainly getting a handle on your finances by opening a Roth IRA. Bravo. There are different kinds of sweep accounts and the rules among financial institutions differ. In essence, with an IRA account, it's a money market mutual fund, an FDIC-insured interest bearing account, and the like. It's where your money gets parked before it's invested.

For example, when you sell a security, the gain is swept into the money market account until it's reinvested. New money can be held in the sweep account -- the money market mutual fund or a comparably safe short-term fund -- until it's invested in stocks, bonds and other securities. In essence, a sweep fund means your money in the account is always earning some interest safely while idle (though not much interest these days).

About the author

Chris Farrell is the economics editor of Marketplace Money.
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