I invest mostly in the stock market. And for most of us, the stock market has treated us well over the past 3 years. However, I think its time to take some stock off the table and increase my cash position. So, I’ve been selling mostly in my tax-deferred accounts (obviously to avoid taxes) in my ETrade and Schwab accounts. (note: I happen to have a Roth from an old 401k rollover and a current 401k managed by as a PCRA at Schwab).

And since I might be maintaining a significant amount of money in cash (i.e., money market), I took a look to see what kind of rates I was getting. Well, I was pretty shocked. First, let me explain a sweep account. Think of the sweep account as the default bucket that your cash gets put into (sometimes it takes days) after you sell stock. It turns out my default sweep account (SweepMax, they call it) on ETrade only pays a HORRENDOUS 0.50% interest if the amount is under $25k and a meager 2.75% if the amount is between $25k and $50k! Dennis Mangan in his Mangan’s Miscellany describes his same complaint. Schwab’s sweep accounts, by contrast, give me the option of 4.85% taxable (Schwab Advisor Cash Reserves, SWQXX) and 3.19% tax-free (Schwab California Municipal SWCXX). Here’s a link to Schwab’s Sweep Account Options.

I dug around a little more to see what the rates should be. According to Bankrate.com, the average Money Market account pays 3.57%, taxable Money Market Funds (MMF) pay anywhere from 4.88% to 5.25%, and tax-free Money Market Funds pay anywhere from 2.87% to 3.82%.

Schwab offers MMFs (traded just like mutual funds) and I found one called Schwab Value Advantage (SWVXX) which pays 5.07%. While it can’t be used as a default sweep account for the proceeds of sold stock, it can be purchased without a load fee. So I went ahead a bought into this fund to park some cash.

ETrade, as far I could tell, does not offer MMFs. When I search for one in their mutual fund screener tool (using money market as the type), whatever fund I found was consistently not available from the buy window. For my taxable account on ETrade, I am able to use a fund that pays a reasonable tax-free rate. I selected JP Morgan Calif Muni which pays a rate of 2.5% and as far as I can tell pays that independent of the balance amount. Assuming a Fed tax rate of 28% and a Calif tax rate of 8%, that works out to a taxable equivalent of 3.9%. Meanwhile I am stuck with getting 0.5% return on my cash in my deferred ETrade account. Can it be possible that I would be better off putting tax-deferred money in a tax-free account on ETrade to avoid the 0.5%???? …I’ll be giving ETrade a call first thing Monday.

Followup after speaking with ETrade reps (Jan 10, 2007)