What Is a Sub Account?

A sub account is a segregated account nested under a larger account or relationship. At the most basic level, a sub account can be thought of as an account within an account.

Key Takeaways

  • A sub account is a segregated account nested under a larger account or relationship.
  • These separate accounts may house data, correspondence, and other useful information or contain funds that are kept under safekeeping with a bank.
  • Each sub account is created for a specific purpose and might only be accessible to a particular person.
  • Common uses include compartmentalizing financial goals, organizing company accounts, or investing retirement money in mutual funds.

Understanding Sub Accounts

A sub account is spawned from and linked to a primary account. These separate accounts could house data, correspondence, and other useful information or contain a balance of funds that are kept under safekeeping with a bank.

In general, each sub account is created for a specific purpose and might only be accessible to a particular person. Sub accounts holding capital operate under very strict guidelines, as funds can only be accessed in accordance with the terms of a power of attorney (POA) agreement approved and executed by the bank.

Example of Sub Accounts

Sub accounts serve many different functions and can vary considerably depending on where they are held and what their objectives are. The term could refer to multiple email addresses linked to one user or financial accounting methods and secondary accounts tied to a primary account with a financial institution (FI).

Here are some examples of how sub accounts might be used:

Company Bookkeeping

Entities set up sub accounts for a variety of bookkeeping and administrative purposes. A sub account is often used to compartmentalize larger accounts, thereby allowing for better tracking of various budget details and expenses. For ease of record-keeping, a company might set up sub accounts for each of its departments.

Sub accounts are a feature of robust financial systems, offering users more reporting options and other managerial benefits.

Savings

Many banks give their clients keen to squirrel money away, which includes the possibility of setting up several separate savings accounts under the umbrella of a main account. Each of these sub accounts will have a specific function, such as to save money for a child, to finance a special vacation or to buy new appliances. By separating each fund, the individual should, in theory, find it easier to organize his or her savings and track the progress of independent financial goals.

Retirement

Previously, life insurance companies traditionally only offered fixed annuities and whole or universal life policies to retirees. In exchange for depositing a lump sum, the holder of a fixed annuity is guaranteed to receive a predetermined amount of principal plus interest to be paid in regular installments throughout retirement.

Over the years, more flexible options have arrived on the scene, including variable annuities: a tax-deferred retirement vehicle that allows customers to potentially increase their income by participating in the equity and fixed-income markets. Instead of offering a fixed, guaranteed income stream, variable annuities chase higher returns, and the associated risks, of investing in mutual funds.

When purchasing a variable annuity, it is possible to choose from a selection of asset classes with varying degrees of risk profiles, including stocks, bonds, and money markets. These basket of investments are known as sub accounts.