In the wake of the Silicon Valley Bank failure, many people are wondering how they can ensure that their bank deposits are insured by the FDIC (Federal Deposit Insurance Corporation). The FDIC is an independent agency of the US government that helps protect bank customers against the loss of their deposits should an FDIC-insured bank or savings institution fail. Therefore, FDIC insurance is backed by the full faith and credit of the US government. The good news is that bank customers do not have to purchase deposit insurance; it is an automatic program for any bank account opened at an FDIC-insured bank. The downside is that deposits are only insured up to $250,000 per depositor, per FDIC-insured bank, for each ownership category – and this is where things can get a bit confusing.
The amount of FDIC coverage that bank customers may be entitled to depends on the FDIC ownership category, which basically means the type of account registration in which your bank deposits are held. Therefore, a bank customer with multiple accounts may qualify for more than $250,000 in insurance coverage if the customer’s funds are held in different ownership categories, and the requirements for each ownership category are met. While there are several types of ownership categories, I will focus on three of the most popular types of accounts for individuals and families. These include single accounts, joint accounts, and retirement accounts.
- Single Account – A single account is one that is owned by one person. All single accounts owned by the same person at the same FDIC-insured bank are added together and insured up to $250,000.
- Joint Account – A joint account is one in which is by two or more people. With a joint account, each co-owner’s share of the account at the same insured bank are added together, and the sum is insured up to $250,000. Here’s where it gets interesting. The balance of a joint account can exceed $250,000 and still be fully insured! For example, if the same two co-owners jointly own a $150,000 CD and a $350,000 savings account at the same bank, the two accounts would be added together and insured up to $500,000 (providing up to $250,000 in insurance coverage for each co-owner.). However, it is important to note that the insurance coverage does not increase by rearranging the owner’s names or Social Security numbers, or changing the styling of their names.
- Certain Retirement Accounts (i.e., IRA, Roth IRA, self-directed 401k, self-directed Keogh, 457 plan) – While all retirement accounts are considered “individual accounts”, the FDIC decided to separate these accounts into their own category. Therefore, all retirement plans owned by the individual at the same bank are added together and insured up to $250,000.
The recent collapse of Silicon Valley Bank has opened people’s eyes to the importance of FDIC insurance. For those that feel they are in danger of exceeding the $250,000 limit at any one institution, there is good news: you have options. If you find yourself in this position, I would encourage you to speak with a bank representative to determine if you can do anything to stay within the limits. Perhaps you can create a new ownership category that will bring you back under the limit. If this is not an option for you then you could always spread out your deposits amongst multiple banks. I understand that having multiple banking relationships increases the complexity of your financial life, but since no one can predict when a particular bank may find itself in trouble in the future, the ultimate goal should be to ensure that the FDIC fully insures the full amounts of your bank deposits.