Protecting Your Cash: Understanding FDIC Insurance
by Carrie Schwab-Pomerantz, CFP®, President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.
June 9, 2010

Dear Carrie,

If I have more than $250,000 at any one bank, should I consider using multiple banks to make sure it’s all insured to the full $250K? If so, what’s the best strategy?

—A Reader

Dear Reader,

Even though the pace of bank failures has slowed down, it's always prudent to understand how your deposits are protected—so thanks for a great question. The Federal Deposit Insurance Corporation (FDIC), created back in 1933 in the wake of the Great Depression, protects the money you deposit in an insured bank, and it does it well: No one with an FDIC-insured account has lost a penny of insured funds since 1933.

Note the phrase "insured funds." The FDIC doesn't necessarily cover all your money, but it does cover your balance, dollar for dollar, up to $250,000 in a single account. FDIC insurance applies to checking and savings accounts, certain retirement accounts such as an IRA, and certificates of deposit (CDs). It does not, however, insure money that you invest in stocks, bonds, mutual funds, exchange-traded funds, insurance policies, annuities, municipal securities, or money market funds. It is important to understand the distinctions. For example, many money market funds from broker-dealers have check-writing features, and many users treat these accounts like checking accounts—but these funds are not FDIC insured.

Two Banks? Not Always
I'll assume from your question that you have more than $250,000 in your bank. That may be OK, depending on what kind of accounts you have and how they are owned. A single account, owned by one person, is insured up to $250,000. A joint account is insured up to $250,000 per owner. An IRA held at an FDIC-insured bank is covered up to $250,000. (If you hold another type of account, such as a trust or corporate account, check with your bank for the exact limits of your coverage.)

As an example, if you and your wife each have $250,000 in individual checking or savings accounts, and you two also have an additional $500,000 in a joint checking or savings account, you're fine. You'll each have $500,000 of FDIC coverage even if both accounts are at the same bank. But say you have a $100,000 CD and a $250,000 savings account with the same bank, both titled in your name only. In this case, you’re only insured up to the $250,000 limit—so you should think about moving the CD to another insured institution. (Most broker-dealers make it easy to find CDs from multiple institutions, and each CD would be insured by each unique bank.)

A Little History and a Look Ahead
I should point out that the traditional coverage limit for FDIC insurance had been $100,000, but that figure was raised to $250,000 in 2008 as part of the economic bailout bill. Be aware, however, that on January 1, 2014, the upper limit of coverage for non-IRA accounts will revert back to $100,000 (the $250,000 will stay in place for IRAs), which could prompt many people to establish multiple banking relationships. (Originally, this higher coverage limit was going to expire on December 31, 2009, but it was extended through 2013 in May 2009.)

Historically, bank failures are uncommon, but as I write this column in May, 72 banks have collapsed so far in 2010. As a result, people can and do lose uninsured money. It therefore is prudent to understand the way FDIC coverage works, and to structure your assets to get the maximum protection.

A final note: FDIC.gov  has lots of useful resources, including a search feature to see if your bank is FDIC-insured (go to "Bank Find"), a calculator to help you understand which of your bank-held assets are covered (the Electronic Deposit Insurance Estimator), and a simple fact sheet on how FDIC insurance works.

Important Disclosure

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction and investment strategy for his or her own particular situation. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

(0610-3520)