In our society, people tend to take the safety of their bank accounts pretty much for granted. If you think back to the most recent banking crisis in 2008 and 2009, however, there was a significant amount of bank consolidation that could have potentially resulted in depositors losing money. This leads to the question, exactly what is covered under the Federal Deposit Insurance program and do your bank accounts qualify for FDIC coverage?
As you probably know, bank deposits are protected by the Federal Deposit Insurance Corporation (FDIC), an independent agency backed by the U.S. government. FDIC coverage insurance is intended to reassure depositors and offer protection in case a bank fails. The FDIC claims that nobody has ever lost any money of FDIC insured deposits if the individual met the requirements of having sufficient coverage, which will be discussed below.
What qualifies for FDIC insurance?
Both federally and state-chartered banks and savings institutions qualify for FDIC insurance. Such institutions are required to post an official notice of this coverage at each teller window. The FDIC insures checking, savings, money market accounts, as well as certificates of deposit. It covers both principal and any interest accrued as of the date that an insured bank shuts its doors. It does not cover securities such as money market mutual funds, stocks, bonds, mutual funds or annuities, even if purchased through an FDIC-insured bank. It also does not cover U.S. Treasury securities, however, these are backed by the full faith and credit of the U.S. government. Finally, the FDIC does not insure safe deposit boxes or their contents.
How much is insured?
The amount of coverage at a bank depends on how much is held there. The maximum coverage amount is $250,000 per depositor per insured bank. However, depending on how your accounts are owned, you may qualify for a larger amount of total coverage at a particular institution. Accounts can be titled into one of several categories of ownership, and each category is insured separately.
Below are the categories of deposits that qualify for separate FDIC insurance. Having multiple accounts at one bank isn't enough to give you additional protection alone. The important point is what type of account each one is, and who the legal owner is.
Single accounts
Single accounts are owned by only one person or entity. They include:
- Accounts held in one person's name
- Accounts established by an agent, trustee, conservator, nominee or guardian for another individual. An example of this would be a Uniform Transfer to Minors Act (UTMA) account
- Sole proprietor business accounts
- Accounts established for the estate of a deceased person
All such accounts at one institution that are held by the same person are combined and counted toward the $250,000 coverage limit. You can't increase the amount of your protection simply by opening more than one account in your name at the same bank.
For example, let's say Mark has a $6,000 checking account and a $40,000 UTMA account for his child at his bank. He also has a $145,000 savings account online at the same bank, and a separate savings account worth $85,000. Only $250,000 of his combined $276,000 is covered by FDIC insurance. The remaining $26,000 is not. If, as a result, he transfers half of his $145,000 savings account to another bank, that would bring his total holdings at his primary bank to $203,500, which falls below the $250,000 coverage limit.
Retirement accounts
Certain retirement accounts qualify for up to $250,000 coverage, separate from the $250,000 single-account coverage. As is the case with individual accounts, deposits in all retirement accounts at a single bank are added together to determine whether the coverage limit has been met.
Covered retirement accounts include:
- Individual Retirement Accounts, including traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs
- Self-directed defined contribution plan accounts, such as an Individual (or "Solo") 401(k) plan
- Self-directed Keogh plan accounts
Keep in mind that FDIC insurance of retirement accounts applies only to cash held in deposit accounts, and not to any securities or mutual funds held in an IRA or other retirement account in the bank. Finally, Coverdell Education Savings Accounts and Health Savings Accounts are not included in this category.
Joint accounts
Deposits that are owned by two or more people who have equal rights to withdraw funds from the account are insured up to $250,000 for each person. This amount is separate from the $250,000 maximum coverage for individual accounts or for retirement accounts. If an individual has more than one joint account at a given bank, their share of all of those joint accounts are totaled and insured up to $250,000. Unless specified otherwise, the FDIC assumes all ownership interests in a joint account are held equally.
Revocable trust accounts
There are two types of revocable trust accounts that qualify for FDIC protection. A POD (payable on death) account is set up so that upon the owner's death, the funds in it are paid to the beneficiary(ies) as designated on the bank's records. A formal revocable (or "living") trust is generally established for estate planning purposes. The owner controls the deposits while alive and the trust becomes irrevocable at the owner's death.
For each account owner with combined revocable trust balances of $1.25 million or less at a single institution, the total amount of coverage is determined by multiplying the number of beneficiaries by $250,000. For account owners who have combined total balances of more than $1.25 million at a single bank and have more than five named beneficiaries, the FDIC insures up to $250,000 per beneficiary or a total of $1.25 million, whichever is greater. The account title must clearly identify it as a trust. The FDIC assumes that all eligible beneficiaries share equally in the trust unless stated otherwise in the bank's records.
Living trust accounts also are insured up to $250,000 per owner for each beneficiary. The account title also must indicate that it is a living trust. Though owners may use the money during their lifetimes, they are not considered beneficiaries when calculating deposit insurance.
Corporations, partnerships, and unincorporated association accounts
Accounts of a corporation, partnership, LLC and unincorporated association (both for-profit and nonprofit) qualify for up to $250,000 at a single bank, and are insured separately from the personal accounts of any shareholders, partners, or members. Accounts owned by the same entity but designated for different purposes--for example, multiple divisions within the same company--are combined and count toward the $250,000 limit.
What happens when a bank fails?
When a FDIC-insured bank fails, the FDIC has two roles. First, it makes sure that the bank's depositors receive payments that cover their insured deposits (up to the limits provided by law). Second, it administers the bank's assets and liabilities, satisfies its creditors, and settles its debts, including any depositor claims for deposits that exceeded the insured amounts.
If you have amounts that exceed a single bank's insurance limits, you will be given a "Receiver Certificate." This will enable you to file a claim against the bank's assets. As those assets are liquidated, payments of uninsured deposits will be made. However, you may receive only a fraction of your total uninsured deposits, and there's no guarantee you will receive any of them.
Holders of safe deposit boxes typically have access to them the next business day (if the bank is acquired), or they are notified by the FDIC by letter about how and when to remove the boxes' contents.
The bottom line
If you have multiple accounts at one bank, check to see who is listed as the owner(s) of each one, what category it falls into, and whether it overlaps with other categories that might affect the amount that's covered. If your accounts aren't completely insured, you should consider moving the uninsured amount(s) to another bank or changing the ownership in order to be fully covered.
Is your money safe? If you have questions about FDIC coverage, how your money can best work for you and what you can do to ensure proper protection, please contact us at info@zinnerco.com or 216-831-0733.
