Cash Management Account vs. Brokerage Account: Key Differences Explained

Choosing between a cash management account (CMA) and a brokerage account depends on how you plan to use your money. While both are offered by financial institutions, they serve different purposes—one focuses on managing cash efficiently, while the other is designed for investing in securities. Understanding their differences can help you decide where to keep your funds.

Though they may seem similar at first glance, CMAs and brokerage accounts differ in functionality, accessibility, and tax implications.

Core Purpose of Cash Management

A cash management account provides liquidity while offering features beyond a traditional checking or savings account. Many financial institutions offer CMAs as an alternative to conventional banking products, integrating higher interest rates, automated cash sweeps, and expanded transaction capabilities.

A key feature of a CMA is the automatic sweeping of uninvested cash into money market funds or other short-term instruments, allowing account holders to earn interest while keeping funds accessible. This benefits individuals and businesses needing cash readily available for expenses while avoiding non-interest-bearing balances.

CMAs also provide transaction flexibility. Unlike brokerage accounts, which may have withdrawal restrictions or settlement periods for trades, CMAs typically allow immediate access to funds via debit cards, check-writing, and electronic transfers. Many also offer bill pay services and direct deposit, making them practical for managing daily financial obligations.

Core Purpose of Brokerage

A brokerage account is designed for investing in financial instruments, allowing individuals to build wealth through market participation. Unlike CMAs, which emphasize liquidity, brokerage accounts support long-term capital appreciation, income generation, and portfolio diversification. Investors use these accounts to buy and sell equities, fixed-income securities, commodities, and derivatives.

Brokerage accounts can be either taxable or tax-advantaged. Standard taxable brokerage accounts offer flexibility in trading and withdrawals but expose investors to capital gains taxes, which in 2024 range from 0% to 20%, depending on income. Tax-advantaged options, such as traditional IRAs and Roth IRAs, offer deferred or tax-free growth, making them attractive for retirement planning.

Some brokerage accounts also provide margin trading, allowing investors to borrow funds against their holdings to increase purchasing power. While margin accounts can amplify returns, they also introduce risk, as losses can exceed the initial investment. Regulation T mandates a 50% initial margin and a 25% maintenance margin to ensure investors maintain sufficient equity in their accounts.

Assets Typically Held in Each

The types of assets held in CMAs and brokerage accounts reflect their different purposes. CMAs primarily hold liquid funds and short-term instruments, while brokerage accounts contain a broader range of investment securities aimed at capital growth and income generation.

Cash Reserves

CMAs are structured to hold liquid assets while earning a return. Many automatically sweep uninvested cash into money market funds, which invest in short-term, high-quality instruments such as Treasury bills, commercial paper, and repurchase agreements. Under SEC Rule 2a-7, money market funds must maintain a weighted average maturity of 60 days or less, reducing interest rate risk and preserving principal stability.

Brokerage accounts may also hold cash reserves, but typically as a temporary holding before deployment into investments. Uninvested cash in a brokerage account may be placed in a default sweep program, often into an FDIC-insured bank deposit account or a money market mutual fund. However, brokerage cash balances are not always FDIC-insured unless explicitly stated, relying instead on SIPC protection, which covers up to $250,000 for cash in the event of broker insolvency. Investors should verify whether their brokerage offers FDIC-insured sweep options or if their funds are exposed to market fluctuations within a money market fund.

Equity Holdings

Brokerage accounts are the primary vehicle for holding equity investments, including common and preferred stocks. Investors use these accounts to buy and sell shares of publicly traded companies, aiming for capital appreciation and dividend income.

Equity investments in a brokerage account are subject to market volatility, and their valuation follows fair value measurement principles under ASC 820. Stocks are categorized into Level 1 (quoted market prices), Level 2 (observable inputs like comparable securities), or Level 3 (unobservable inputs requiring valuation models). Capital gains on stock sales are taxed at short-term rates (ordinary income tax rates up to 37% in 2024) if held for less than a year, or long-term rates (0%, 15%, or 20%) if held for more than a year.

Cash management accounts rarely hold equities directly. Some hybrid CMAs may allow limited investment in exchange-traded funds (ETFs) or mutual funds, but these are typically structured to maintain liquidity rather than facilitate active trading.

Other Securities

Brokerage accounts accommodate a wide range of investment instruments, including bonds, options, mutual funds, ETFs, and alternative assets like REITs and commodities. Fixed-income securities, such as corporate and municipal bonds, generate interest income, which may be tax-exempt if issued by state or local governments under IRC Section 103. Investors in taxable brokerage accounts must report bond interest as ordinary income, while those holding tax-advantaged accounts like IRAs can defer taxation.

Options trading is another feature exclusive to brokerage accounts, allowing investors to hedge risk or speculate on price movements. Under IRS Section 1256, certain options contracts, such as index options, receive favorable 60/40 tax treatment, where 60% of gains are taxed at long-term capital gains rates and 40% at short-term rates, regardless of holding period.

Cash management accounts focus on preserving liquidity and do not typically support complex securities. Some may offer access to short-term bond funds or certificates of deposit (CDs), but these are structured to maintain principal stability rather than generate high returns.

Access to Funds and Transactions

CMAs are designed for seamless liquidity, often integrating with payment networks to allow real-time fund transfers. Many offer same-day ACH transfers, wire capabilities, and mobile payment compatibility. Some CMAs even provide faster direct deposit processing by crediting paychecks up to two days early, leveraging predictive clearing models used by financial institutions.

Brokerage accounts impose varying levels of liquidity depending on the assets held. Securities transactions adhere to T+1 settlement rules, meaning proceeds from stock sales are typically available the next business day. This can delay immediate access to cash compared to CMAs, which do not require settlement periods. Margin-enabled brokerage accounts mitigate this delay by allowing investors to borrow against their portfolio, providing liquidity without liquidating holdings. However, margin loans accrue interest, which as of 2024, can range from 7% to 12% annually, depending on the brokerage and loan size.

Effect on Taxes

Tax treatment varies significantly between CMAs and brokerage accounts. CMAs primarily generate taxable interest income, while brokerage accounts can trigger capital gains, dividend taxation, and other investment-related liabilities.

Interest earned in a CMA is classified as ordinary income and reported on IRS Form 1099-INT. This income is subject to federal income tax at rates ranging from 10% to 37% in 2024, depending on the taxpayer’s bracket. Some CMAs invest idle cash in municipal money market funds, which may provide tax-exempt interest under IRC Section 103 if the securities are issued by state or local governments. However, these exemptions typically apply only to federal taxes, and state taxation depends on residency and the bond issuer’s location.

Brokerage accounts introduce more complex tax considerations. Capital gains taxes apply when securities are sold for a profit, with short-term gains taxed as ordinary income and long-term gains benefiting from preferential rates of 0%, 15%, or 20%. Qualified dividends, typically from U.S. corporations or eligible foreign entities, are taxed at these same long-term capital gains rates, while nonqualified dividends are subject to ordinary income tax. Investors must also consider the Net Investment Income Tax (NIIT), which imposes an additional 3.8% tax on investment earnings for individuals with modified adjusted gross incomes exceeding $200,000 ($250,000 for married couples filing jointly).

Potential Service Charges

CMAs generally have fewer direct fees, as they are designed for transactional efficiency, while brokerage accounts may include trading commissions, advisory fees, and account maintenance costs.

Many CMAs eliminate monthly maintenance fees, relying instead on revenue from interest rate spreads and interchange fees from debit card transactions. Some impose charges for wire transfers, stop payments, or excessive withdrawals, though these are often waived for high-balance customers.

Brokerage accounts, particularly those offering active trading, may incur commission fees on stock, options, and futures trades. While most major brokerages have adopted zero-commission trading for U.S. equities, options contracts still carry per-contract fees, typically around $0.65. Managed brokerage accounts, such as robo-advisors or full-service advisory accounts, charge management fees ranging from 0.25% to 1.5% of assets under management. Margin accounts introduce additional costs, with interest rates varying based on the borrowed amount and prevailing market rates.