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A sweep account and an IRA

Chris Farrell Feb 22, 2012

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).

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