Every proper bank has a disclosure on their web site: FDIC insured up to $250,000. But what does it mean exactly?
What happens if you have more money than $250,000? Is your money at risk?
Probably only people who approach $250,000 in an account will ask those questions.
There are 2 types of insurance for different types of accounts.
The FDIC insurance is for deposit accounts: checking, savings, money market accounts, sweep accounts and certificate of deposit (CDs).
Surprisingly the retirement accounts such as IRA and 401k are included. The $250,000 insurance is per depositor per account category.
The SIPC insurance is for securities held in a brokerage account. The brokerage accounts are protected for up to $500,000 for securities and $250,000 limit for cash.
The SIPC insurance is for securities held in a brokerage account. The brokerage accounts are protected for up to $500,000 for securities and $250,000 limit for cash.
Why is there limit of only $250,000 for cash? Brokerage firms use sweep accounts for cash and cash is swept into deposit accounts through bank sweep programs. These sweep accounts are covered by FDIC insurance, which goes only up to $250,000 limit per person per each account type.
All deposit accounts are FDIC insured per depositor, per each account category.
If in addition you have more than one CDs, they all are counted as one account type.
The interesting thing is that IRA and 401k are insured by FDIC, only up to $250,000. Both IRAs and 401k accounts are considered to the same type of account. Health savings account is also in the same category. That means that the FDIC insurance limits will be shared among all three accounts if you have them at the same institution and entire sum of retirement money in IRA, HSA and 401k will be insured only up to $250,000. It might be the best to hold IRA, HSA and 401k with different institutions unless you are sure you will never reach the limits.
You can use the Electronic Deposit Insurance Estimator (EDIE) to play with the numbers and see what is insured and how. It works OK to get the feeling.
But who keeps so much money in a checking or savings account? You want your money to work and produce returns.
That means that if you have one joined checking account with two co-owners, the entire account is insured for $500,000 ($250,000 per co-owner). If you have more accounts of the same type with the same bank, the limit will be shared among all accounts of the same type.
If you have a checking and a savings accounts with the same bank, the amounts will not be shared because those are different type accounts.
If you have two checking accounts and one savings account and all of them are joined, the insured amount will be $500,000 for both checking accounts and another $500,000 for the savings account.
If you have an additional singe non-joined savings account with the same bank, this single account will share the limit with your portion of the insured amount in the joined savings account.
The interesting thing is that IRA and 401k are insured by FDIC, only up to $250,000. Both IRAs and 401k accounts are considered to the same type of account. Health savings account is also in the same category. That means that the FDIC insurance limits will be shared among all three accounts if you have them at the same institution and entire sum of retirement money in IRA, HSA and 401k will be insured only up to $250,000. It might be the best to hold IRA, HSA and 401k with different institutions unless you are sure you will never reach the limits.
You can use the Electronic Deposit Insurance Estimator (EDIE) to play with the numbers and see what is insured and how. It works OK to get the feeling.
But who keeps so much money in a checking or savings account? You want your money to work and produce returns.
A more interesting question is how brokerage accounts are insured.
As I was approaching the $250,000 in my brokerage account I wanted to know if I should start opening more brokerage accounts with other banks to have all money covered.
The securities in a brokerage account are insured by SIPC for up to $500,000. If there is cash in the account, the cash goes into the sweep account and which will be insured by FIDC for the time being.
I usually don't hold more tan $250,000 of cash in that account (yet). It is a joined account, So the sweeped cash is insured up to $500,000 because of 2 depositors and the securities are insured up to $1,000,000.
With all that information it looks like in my joined brokerage account I can hold up to $1,000,000 in securities including up to $500,000 in cash. This amount in cash is not in addition to securities but as parking cash position when some securities are sold and before the new once are bought. So total will still be $1,000,000.
Obviously there is still time left before I will get over those limits and will have to open another brokerage account.
And I probably worry too much. My research on the web showed that the SIPC insurance had to be used are exceedingly rare and that FDIC was used more frequently than SIPC.
What happens when a FDIC insured bank fails?
The FDIC replaces cash up to insurance limits. It happens within few days of bank closing and it provides the insured with a new account at another bank and the insured will receive a check with the amount. If the money exceeds the limits, the bank assets will be first liquidated and the proceeds will be divided between debtors pro-rata.
