Following up my previous post on putting brokerage account cash into the money market, I just got off the phone with ETrade and I am not happy. And surely, those of you in a similar situation should not be happy either. Here’s the crux of it….

If you have a retirement account such as a Roth-IRA at ETrade and you maintain an amount of cash less than $25k, you will receive an annual return of 0.5% on that cash….that’s right 1/2 of 1%. The only way to currently receive a higher rate is to put it into a tax-free money market option such as JP Morgan Calif Municipal which has no minimum balance and pays 2.5%. Yes, you read that right…I was told that the best rate I can get in my non-taxable account is to put it into a tax-free money market mutual fund. Here is ETrade’s rate comparison for cash options. The agent I spoke with agreed that this is redundant and also said that the money market rates is one of the biggest complaints they get. I also told him that I was unable to purchase a money market fund through their mutual fund screener tool and he referred me to someone at the mutual fund desk. That person told me that “there aren’t any money market mutual funds available on ETrade that I am aware of”.

For their taxable accounts, they have a better answer. I was told that in addition to a reasonable choice of the tax-free money market, they do offer a good rate (he quoted 5.05%) in an ETrade Bank account which allows instant switching back and forth between the “bank account” and the non-retirement “brokerage account”.

Bottomline, if one keeps under $25k in a retirement account at ETrade, your best bet is to put it in a tax-free money market (the illogic of it kills me), buy a super-safe bond such as a soon-to-expire T-Bill (I opted for this), or move it to another broker such as Schwab (currently offering 4.85% with no minimum in its sweep account). As an added bonus, a T-Bill (as with Treasury notes and bonds) are free of state income tax.

Here Maxfunds.com discusses the sweep options at various brokers and gives a thumbs up to Schwab and Fidelity and a thumbs down to ETrade and TD Ameritrade.

E*TRADE now makes more from net interest income than they do from stock trading commissions…..

What E*TRADE doesn’t want new customers to do is choose a money market fund as their sweep balance, but if you select “view tax-free alternates” when asked to choose a sweep option, other higher-yield options appear.

The tax-free money market funds pay far more than the normal sweep options – and the interest is tax-free federally, and could be tax-free in states with the appropriate fund.