His IRA Will Hold $140,000 in ‘Cash’ Earning 0.05% While the Fund Next to It Pays 4.3%. The Brokerage Will Never Call to Mention It

A 64-year-old plans to roll a long-held 401(k) into an IRA at a large brokerage ahead of retirement, and he plans to keep $140,000 in cash as a buffer for his first few years of withdrawals. Once the transfer settles, that money lands in the brokerage’s default cash sweep, which pays 0.05%, while a money market fund on the same platform yields about 4.3%. Nothing requires the firm to point out the gap.

This situation is common, as rollovers, fund sales, bond maturities, and dividends all produce cash, and most brokerages automatically park it in a sweep account. Many new retirees keep cash on hand, but they often end up in the sweep account by accident.

Why Sweep Programs Ended Up in Court

The spread has drawn legal examination as a wave of class actions accused large brokerage firms of profiting from sweep programs. The cases alleged that the firms failed to properly disclose that customers could earn higher returns by moving their cash into other accounts or cash alternatives like money market funds, according to an analysis by law firm Sheppard Mullin. Merrill Lynch, Wells Fargo, LPL, and many other brokerage firms have faced lawsuits over sweep rates. The firm earns more on swept deposits than it pays customers, and the difference becomes revenue.

Rates have also moved this fall. On September 17, 2026, the Fed raised the upper bound of its target range to 4% from 3.75%. Recent coverage has pointed to money market funds as a simple way to benefit from rising rates. Default sweep rates typically lag those moves.

What 0.05% Costs on $140,000

At 0.05%, $140,000 earns about $70 a year. At 4.3%, the same balance earns roughly $6,020, a gap of about $5,950 per year. If the full balance stayed parked and compounded for a decade, the shortfall would grow to around $72,600. A retiree drawing down the bucket would lose less than that. The sweep still gives up nearly $6,000 per year.

Every common benchmark beats the sweep by a wide margin. Treasury bill yields range from 4.0% on 4-week bills to 4.5% on 52-week bills. Even the national average 12-month CD, a low bar, pays 1.8%.

IRA Tax Rules Widen the Gap

Earnings inside a traditional IRA aren’t taxed until you withdraw them. The account itself is exempt from taxation under 26 U.S.C. § 408(e)(1). In a taxable account, money market interest gets taxed as ordinary income every year. Inside the IRA, the full yield compounds. Switching from the sweep to a fund within the IRA counts as a trade inside the account, so it triggers no tax.

Withdrawals are included in gross income no matter what the cash was invested in. The choice of cash vehicle has no tax effect on the way out. Required minimum distributions begin at age 73, when a cash reserve becomes even more useful for covering forced withdrawals.

Two Ways to Put the Idle Cash to Work

Path One: A Government Money Market Fund

This is the more common route for people in this position. A government money market fund holds Treasury bills and similar short-term debt, so its yield tracks the Fed’s rate. You can sell it for cash within a day when a withdrawal is due, and the yield floats, so if the Fed cuts rates, income falls. Funds like this aren’t FDIC-insured, but they hold short-term government debt.

Path Two: A Treasury Bill Ladder

Retirees with a fixed withdrawal schedule can buy bills that mature when they need cash. The 26-week bill yields 4.4% and the 52-week bill 4.5%, which locks in rates for a set period. The downside is maintenance: matured bills pay into the sweep, and the cash sits there at 0.05% until you reinvest it.

Some retirees keep only a small amount in the sweep to cover fees, and moving it to an average bank CD gives up most of the available yield.

What to Check Before the Next Statement

1. Find the sweep rate. Look at the cash line in the IRA and the brokerage’s cash disclosures, because firms often pay different rates by balance tier, and the default tier tends to be the lowest.
2. Compare options for the reserve. Some retirees leave a small balance for fees and move the rest into a money market fund or a bill ladder. On a $140,000 reserve, this one change is worth more than most fee comparisons.
3. Check whether the default can change. Some platforms allow a money market fund to serve as the account’s core position, so dividends and maturities stop landing at 0.05%.
4. Check again after each rollover or maturity. New cash goes back to the sweep by default. Many people mistakenly assume that “cash” shown on a statement earns market rates.

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