Brokerage accounts vs. bank accounts for earning interest
While these brokers pay interest similar to what you'd receive in a savings account, there are a number of differences to be aware of, including deposit insurance and features.
Deposit insurance
Savings accounts are insured by the Federal Deposit Insurance Corp. (FDIC), which protects up to $250,000 per person, per bank.
All five brokerages above are members of the Securities Investor Protection Corp. (SIPC), which protects up to $500,000 per person (up to $250,000 in cash), per brokerage account in the event that the broker becomes insolvent.
However, SIPC coverage doesn't protect the value of money market funds, such as those that Fidelity and Vanguard sweep funds into by default. In other words, SIPC coverage doesn't necessarily cover the exact dollar amount of cash in a brokerage account the way FDIC coverage does in a savings account.
Is a brokerage account a good place to earn interest?
Bill Hampton, a financial consultant based in Atlanta, says that brokerage accounts can be good places to earn interest — for savers who don’t need immediate access to their money.
However, Hampton says that some brokerage accounts have limitations. “For instance, some do not offer the ability to write checks like a bank would. Some limit the amount of transactions you can make in a particular month,” Hampton says.
“A client would have to determine if it’s a long-term savings account that they’re not going to touch for six months or a year, or if it’s going to be an emergency fund that they don’t plan to utilize. If it’s going to be their regular account that they move cash in and out of, they may want to check with the restrictions that each brokerage firm has,” Hampton says.
He points out that many accounts are limited to six transactions per month, which is “plenty in most cases.”
Hampton says that despite these limitations, brokerage accounts can still be a viable option for savers who are seeking high yields and don’t need to touch their money several times a week.
“If individuals or clients can find better rates at a brokerage firm than at their local bank, which is most likely, then that’s a very good opportunity to earn a high interest rate,” he says.
