Cash accounts are brokerage accounts that require the client to render full payment for a transaction by the agreed upon settlement date. The nature of this type of account means that the customer is not granted the privilege of buying on margin, or using borrowed money secured through the broker in order to purchase securities. Sometimes referred to as a special cash account, these cash only investment accounts are often used for both retirement nest eggs and trusts for minor children.
The guidelines for the structure and administration of a cash account in the US are set by what is known as Regulation T. Essentially, Regulation T is mainly concerned with setting the percentages of deposits that must be present in a margin account in order for the investor to buy on margin or for the broker to solicit loans for funds to be placed in a brokerage account. Regulation T does not allow either of these functions for this type of account.
A cash account is an excellent option when the goal is to establish a secure nest egg for retirement. Perhaps the best example of one for this purpose is the Individual Retirement Account. An IRA is completely funded with cash deposits that are then invested on the part of the broker. Generally, the investments that are undertaken with the funds in an IRA are low risk in nature, guaranteeing a modest but consistent pattern of growth.
Trust accounts for minor children and other dependents are also common applications. Parents who wish to provide future financial stability for their children in the event that one or both parents pass away often includes the ability of an administrator or legal guardian to access and use the funds until the children are of legal age. The structure of the account normally sets restrictions on how the funds may be used, and how much of the principal balance of the account can be withdrawn during a given calendar year.
