Understanding FDIC and SIPC Insurance

The recent collapse of Silicon Valley Bank and Signature Bank has raised concerns among consumers who have placed their hard-earned money in banks and brokerage firms and emphasized the importance of having insurance protection. In the United States, the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC) are two organizations that provide such protection to consumers in the unlikely event of a bank or brokerage firm failure. While both the FDIC and SIPC share a similar purpose, it’s crucial to understand their differences and coverage limits to ensure that your assets are protected.

The FDIC is an independent agency of the federal government that was created in 1933 to address the numerous bank failures that occurred during the Great Depression and restore confidence in the nation’s banking system. The primary responsibility of the FDIC is to provide insurance and safeguard the deposits of consumers in the event of a failure of an FDIC-insured bank. Additionally, it is critical in overseeing banking activities and enforcing regulations.

FDIC insurance covers certain deposit accounts, including checking accounts, savings accounts, money market accounts, and certificates of deposits (CDs). However, the FDIC does not insure the money you invest in stocks, bonds, mutual funds, life insurance policies, or annuities, even if you obtain these products from an insured bank.

Currently, the FDIC insurance limit is $250,000 per depositor, per ownership category, and per insured bank. This coverage is dollar-for-dollar and includes both principal and accrued interest. Thus, if your principal deposits total $100,000 and your accrued interest is $5,000, the entire $105,000 would be covered.

In most cases, there is no need to apply for FDIC insurance coverage as it is typically automatic when opening a deposit account at an FDIC-insured institution.

You can extend your FDIC insurance coverage by spreading deposits across multiple FDIC-insured banks. For example, if you have a savings account with a balance of $300,000, $50,000 may not be insured. Yet, if you split those deposits equally between two banks, you would have two savings accounts with a balance of $150,000, which would be fully insured. Additionally, you can confirm that the banks are different entities by cross-checking their FDIC certificate number, which is unique to each bank.

You also can open accounts in different ownership categories at the same bank to maximize your FDIC insurance coverage. Examples of ownership categories include single accounts, joint accounts, certain retirement accounts, trust accounts, business accounts, and government accounts. Below we have outlined a few ownership categories and their corresponding limits.

• Single account: $250,000 per owner
• Joint account: $250,000 per co-owner
• IRAs and certain retirement accounts: $250,000 per owner
• Revocable Living Trusts: Each owner may be insured up to $250,000 for each beneficiary

Suppose you are married and have $200,000 deposited in a personal savings account and $500,000 deposited in a joint savings account. Since single accounts are insured separately from joint accounts, the FDIC would fully insure your personal savings account funds. As for the joint savings account, you and your spouse would also be entitled to a coverage limit of $250,000, resulting in total coverage of $500,000. This means your combined FDIC insurance coverage would be $700,000.

The SIPC is a non-profit, non-government membership corporation created in 1970. SIPC insurance coverage protects against the loss of securities and cash in the unlikely event that a SIPC member brokerage firm fails. Most brokerage firms registered with the Securities and Exchange Commission (SEC) are SIPC members, and the few that are not must reveal this fact to their customers.

Generally, SIPC insurance covers up to $500,000 per customer per brokerage firm. Of this amount, up to $250,000 can be in cash. Additionally, most brokerage firms offer extra protection beyond the SIPC’s limit. Thus, we recommend consulting with your advisor to understand the extent of your coverage.

If you have multiple accounts at the same brokerage firm, SIPC protection is based on “separate capacity” or the type of investment account. Examples of separate capacities include an individual account, joint account, Traditional IRA or Roth IRA. Each separate capacity is protected up to the limit of $500,000. Thus, if you have an individual account, Traditional IRA and Roth IRA at the same brokerage firm, the SIPC would insure them separately for up to $1.5 million.

Conversely, accounts held in the same capacity are combined for purposes of the SIPC protection limits. If you have two Traditional IRAs held at the same firm, your SIPC insurance coverage would be limited to $500,000. Nonetheless, as mentioned earlier, excess SIPC coverage may still protect your assets.

The FDIC and SIPC were established to offer a safety net for consumers in case of a bank or brokerage firm’s failure. Being aware of the differences between FDIC and SIPC insurance coverage can assist you in making informed decisions regarding where to deposit and invest your money. To ensure the safety of your assets, we suggest seeking guidance from your Aldrich Wealth Advisor. They can help you understand the nuances of FDIC and SIPC insurance coverage and help ensure that your assets are protected again unforeseen situations.