What Is a Settlement Account and How Does It Work?

A settlement account is a core component of an investment account, serving as the central hub for all cash transactions. When you deposit funds to invest or receive proceeds from a sale, the cash resides in this account before it is put to work or withdrawn. This account is the temporary holding place for the cash used to buy and sell securities.

The Function of a Settlement Account

The primary role of a settlement account is to facilitate your investment activities. When you transfer money into your brokerage account from an external bank, those funds are first credited to your settlement account. This makes the cash available for you to purchase various financial instruments.

When you place an order to buy a security, the brokerage firm will debit the cost of the purchase from your settlement account. This happens on the settlement date of the trade, which is now one business day after the trade date (T+1). This shortened settlement cycle means the cash is required sooner than in the past.

Conversely, when you sell an investment, the proceeds from that sale are deposited into your settlement account. Once the sale settles, the cash becomes available for you to either reinvest or withdraw to your linked bank account.

Dividend and interest payments from your holdings are also automatically credited to your settlement account. For example, if you own shares of a company that pays a quarterly dividend, that cash payment will appear in your settlement account on the payment date. This income can then be accumulated, reinvested, or withdrawn.

Types of Settlement Account Options

The cash held in your settlement account is not simply sitting in a non-interest-bearing account. Brokerage firms typically “sweep” these balances into an interest-earning vehicle. One of the most common options is a money market mutual fund. A money market fund is an investment, not a bank deposit, and is protected by the Securities Investor Protection Corporation (SIPC) rather than the Federal Deposit Insurance Corporation (FDIC). These funds seek to maintain a stable $1.00 net asset value (NAV), though it is not guaranteed.

Another prevalent option is an FDIC-insured deposit program. In this arrangement, the brokerage firm partners with one or more banks to sweep your uninvested cash into interest-bearing deposit accounts. This structure provides you with FDIC insurance coverage up to the standard limit of $250,000 per depositor, per insured bank.

Some brokerage firms may also offer proprietary cash balance programs. These function similarly to a savings account, where the firm pays a set interest rate on your cash balances. The specific structure and insurance coverage of these programs can vary, so it is important to review the details provided by your brokerage.

Managing Your Settlement Account

You can find your settlement account balance on your brokerage account’s online dashboard or periodic account statements, often labeled as “settlement fund” or “cash balance.” Your settlement fund balance may differ from your “cash available for withdrawal,” as the latter may not include recent deposits that have not yet cleared. “Buying power” often includes both your cash balance and any available margin.

Moving money into your settlement account is a straightforward process. You can initiate an electronic funds transfer (EFT) from a linked bank account, which takes one to three business days. For larger or more urgent transfers, a wire transfer can be used, which is often completed on the same day but may incur a fee.

Withdrawing funds from your settlement account follows a similar process. You can initiate an EFT to your linked bank account. You must ensure that the funds you wish to withdraw are fully settled from a recent sale before they are available.