What coverage does the FDIC provide for my accounts?
HOW MUCH FDIC INSURANCE COVERAGE DO MY ACCOUNTS HAVE?
A bank labeled as ‘FDIC insured’ covers each depositor up to $250,000, backed by the Federal government. For example, if a bank were to go belly-up, as a customer, any money I keep at that bank in my savings account would be returned to me up to a net of $250K. So, If I have $600,000 in a savings account at the bank, I am guaranteed the backing of the Federal government to get back at least the $250,000 in the rare event of the bank’s failure. The fate of my other $350,000 might be temporarily uncertain.
Here is a breakdown of the various account types and how much protection is generally included with FDIC insurance.
- Checking accounts
- Savings Accounts
- Money market deposit accounts
- Certificates of deposit (CD)
- Prepaid cards (assuming certain FDIC requirements are met)1
It is important for investors to be aware of protection limitations for various accounts. Always review financial documents in full before placing funds with any financial institution.
OWNERSHIP TYPE MATTERS
The amount of coverage can also be impacted by the type of ownership–how the funds are held at the bank–what the FDIC defines as the FDIC ownership category.
Accounts that are individually owned such as checking, savings, and money market accounts. If you have more than one of these accounts at the same bank, you are covered up to the $250,000 in total between all of these accounts at the same bank. An account owned by a sole proprietorship is also considered a single account of the business owner.
*If you have a named beneficiary listed for your checking, savings, or money market account, your account is actually treated as a Revocable Trust account (see below).
Certain retirement accounts held at a bank are covered by FDIC insurance if the plan participant or account owner has the right to direct how the money is invested, whether that is through a financial professional like at Highline, or done personally.
IRAs, Self-directed 401(k) or profit-sharing plan accounts, Keogh plans, Solo 401(k)s, and all Section 457 deferred compensation plan accounts are all covered up to the $250K total between all accounts held by that person at that same bank.
Not all retirement accounts are covered by FDIC insurance, but traditional IRAs, Roth IRAs, SEPs, and SIMPLE are covered up to the $250,000 limitation. 403(b) plans are not covered and certain employee benefit plans have their own separate insurance through the Pension Benefit Guaranty Corporation or PBGC.
Accounts held with a spouse, family member, or two or more people, when there IS NOT a named beneficiary will qualify for FDIC insurance as long as all of the account owners:
- Are alive
- Have equal rights to make withdrawals from the account
- Sign the deposit account signature card (unless the account is a CD)
In the case of Joint Accounts, each co-owner’s share of any and all joint accounts at that same institution are covered up to the net $250K.
When an account owner fills out a beneficiary designation form for a particular bank account, the FDIC deems those as trust accounts. There are two types of trust accounts:
- Revocable Trust Account ($250K)
- A deposit account owned by one or more people that identify and name a beneficiary or beneficiaries. The named beneficiaries would receive any remaining funds after the account owner or owners’ death, this includes beneficiaries named for the account in Living Trusts, Payable on death (POD), or Transfer on death (TOD) accounts.
- The beneficiaries must be named in the bank’s beneficiary form, or in the trust document, and can be an individual, charity, or non-profit.
- The account must be properly titled to disclose the trust relationship, such as (Name of Trust) Living Trust, POD, etc.
- The owner is ensured up to $250,000 for EACH beneficiary for revocable trust accounts3.
- Irrevocable Trust account (250K)
- A deposit account held within an irrevocable trust, where the owner can no longer make changes to the trust document.
- Irrevocable trusts are insured up to a maximum of $250K for a deposit account, even if there are multiple beneficiaries and the deposit account size is larger than $250K.
Employee benefit plans
When an employee has a defined benefit plan, pension plan or other employee benefit plan managed and invested by the plan administrator and not the individual employee, the employee’s account is also insured up to $250,000 as long as each participant has a non-contingent interest under the plan2.
Deposits owned by corporate entities, partnerships, associations, and non-profit or for-profit organizations are also ensured up to the net max of $250K. This $250K max for the corporate entity is separate from any personal accounts of account owners or corporate members.
WHAT IS NOT COVERED
Investments in stocks, bonds, mutual funds
The government will not back an individual's investment decisions made by investing their own money in markets. SIPC insurance4 for up to $500,000 covers securities in brokerage accounts, not the FIDC.
Life insurance policies
Life insurance policies are the responsibility of the insurance carrier who issued the policy, which is why vetting multiple insurance carriers and policies is crucial before signing and funding any life insurance policy.
Similar to life insurance policies, annuities are also the responsibility of the insurance carrier to properly fund. Insurance companies have their own regulatory bodies, insurance, and a host of mechanisms to support the proper running of these institutions.
Municipal securities, like tax-exempt municipal bonds, are the responsibility of the municipality issuing the bond. Placing funds in these bonds is also considered investing and not covered by FDIC insurance.
Safety deposit boxes
Physical items in a safety deposit box are not backed by the federal government and are the responsibility of the bank and bank branch. In the event of a bank failure, the regulators or the new bank will communicate about removing contents from the safety deposit box.
U.S. Treasury bills, bonds, or notes
T-bills and other U.S. Treasuries are not directly insured by the federal government. However, what investors receive is the assumption that the country issuing the paper is trustworthy and able to pay its debts over the term of the paper. Investing in Treasury bills, Treasury bonds, or Treasury notes is backed by the full faith and credit of the U.S. government. U.S. Treasury bills are generally considered to be risk-free, or as close to risk-free as possible.
On another note–and for a future article–when we hear news outlets reporting about the growing federal deficit and the country’s ever-growing interest payment size, what they are broadly referring to is the interest that needs to be paid because of the paper issued by the U.S. government, like those Treasury bills.
If you have questions about FDIC insurance, you can visit the FDIC’s website and learn more: https://www.fdic.gov/, or please feel welcome to contact your Highline advisor.
Investments are not FDIC insured, have no guarantee, and may lose value.
Sources & References
1 FDIC.gov, ‘Are my Deposit Accounts Insured by the FDIC?’, 07/1/21, https://www.fdic.gov/resources/deposit-insurance/financial-products-insured
2, ‘Deposit Insurance at a Glance,’ FDIC, updated 2014, https://www.fdic.gov/resources/deposit-insurance/brochures/documents/deposit-insurance-at-a-glance-english.pdf
3 ‘Your Insured Deposits,” FDIC, updated 1/2020, https://www.fdic.gov/resources/deposit-insurance/brochures/documents/your-insured-deposits-english.pdf
4 SIPC, Introduction for Investors, https://www.sipc.org/for-investors/introduction
This article is intended for informational and educational purposes only and does not constitute investment advice, a recommendation, or an offer or solicitation to purchase or sell any securities, funds, or strategies to anyone. The opinions expressed are subject to change without notice. Investing involves risk.