DEFINITION of Cleared Funds
Cleared funds are the balance in an account that is able to be withdrawn or used in financial transactions. Until funds are considered to be cleared funds they are considered to be pending, and investors or customers will be unable to conduct transactions with them. Available funds are not the same as cleared funds. Banks are required by law to make a certain portion of deposits available to the depositor within a few days of the deposit. However, that does not mean the money has been moved from the check writer's account. If available funds are withdrawn from the account and the deposited check does not actually clear, the amount of the check will be withdrawn from the depositor's account possibly resulting in a negative balance.
BREAKING DOWN Cleared Funds
When cash or checks are deposited into an account, either as an account funding transaction or as the result of the sale of a security, it may take several days until the financial institution is able to make all of the funds available for withdrawal or trading. A check clears when funds are moved from the check writer's bank to the bank of the person depositing the check that was written. If the check writer and depositor use the same bank, this can potentially happen in the same day. When a person receives a check and deposits it, the bank receiving the deposit makes a request to the bank that houses the account the check was written from. Intermediary banks, clearing houses, or the Federal Reserve may assist in the transaction. This can take varying amounts of time. Often, larger deposits may require a longer period of time to clear than smaller ones, especially if the size of the deposit requires a financial institution to comply with government regulations.