16 Mar 2023 Is My Money Safe?

It’s a reasonable question to ask. One that is most often asked during times of stock market volatility like we experienced during last year’s bear market. The answers to the question in that context are often centered around portfolio diversification (don’t put all your eggs in one basket), asset allocation (how much of your portfolio is in stocks vs. bonds) and time horizon (how long you have until you spend the money in your account.)

However, given the fact that we just witnessed the 2nd and 3rd largest bank failures in U.S. history, you might now be asking the same question but from a different perspective. Perhaps the question is now less about how your money is invested and more about where. With that in mind, I thought it might be good to offer a quick review of a few different types of protection that are in place to keep your money safe during times of financial uncertainty.

First type of protection, the FDIC. The Federal Deposit Insurance Corporation is an independent agency of the United States government, created in 1933, to protect bank account owners against the loss of their deposits if an FDIC-insured bank fails. The likelihood of such a scenario may be small but it can happen (as we’ve just seen with Silicon Valley Bank and Signature Bank.) To be covered, it’s important to make sure the bank you use is FDIC insured and that your deposits are under the appropriate coverage limits. The same goes for credit unions but they’re covered by a different organization – the NCUSIF or National Credit Union Share Insurance Fund. Generally speaking, you can keep up to $250,000 at an FDIC insured bank and sleep well at night knowing that your money will be available when you need it.

It is possible to have more than $250,000 at one insured bank or savings institution and still be fully insured, but you would need to make sure that your deposits are held in some combination of ownership categories that meet the FDIC rules. Figuring out just how much of your money at a single bank is insured can be pretty straightforward if you simply keep your $50,000 cash cushion in a savings account at your local bank or credit union. But what if you just sold your house and you’re parking $800,000 of the proceeds at the bank until you find your next family home? Or you recently sold your rental property and you’re stashing $400,000 in cash while you wait for your next opportunity? Or you’re a very conservative investor and you want to keep $600,000 of your nest egg in bank CDs? And what if you have $50,000 in a savings account, $300,000 in a business account, a $100,000 certificate of deposit and a revocable trust account with your kids listed as beneficiaries containing $300,000 all held at one FDIC-insured bank? How much of your total balance would by covered by FDIC or NCUSIF in those situations?

Here are the basic FDIC coverage limits?*

Single Accounts (owned by one person with no beneficiaries): $250,000 per owner

Joint Accounts (two or more persons with no beneficiaries): $250,000 per co-owner

IRAs and other certain retirement accounts: $250,000 per owner

Revocable trust accounts: Each owner is insured up to $250,000 for each unique eligible beneficiary named or identified in the revocable trust, subject to specific limitations and requirements.

Unfortunately, even with the FDIC coverage limits plainly listed, it can still be challenging to figure out how much money you can keep at a single bank without exceeding the limits of coverage. That’s especially true if you own multiple accounts with your spouse or family. I wish I could tell you that my years of experience have enabled me to calculate the exact amount of coverage available in every situation with 100% confidence, but that’s not always the case. Which is why I’m thankful for this handy calculator. It was created by the FDIC and it’s free for anyone to use. I used it to calculate coverage in each of the scenarios I listed above and found it to be a bit wonky but still a useful tool for confirming coverage.

If you currently have more than $250,000 at a single bank or credit union, I recommend confirming that your total balance is covered by FDIC or NCUSIF. It’s also important to confirm that your financial institution is a member of one of the insurance organizations regardless of your account balance. You can always call or visit your bank get your answers. Or you can use these handy tools to complete both tasks, it should only take a few minutes…

Some information on banks…

– Click here for more information about the FDIC.

– You can use Bank Find or call toll-free 1-877-ASK-FDIC to make sure your bank or savings association is insured by the FDIC.

-And here’s a link to the FDIC calculator I mentioned.

And on credit unions…

-Click here for more information about the NCUSIF.

-You can click here to make sure your credit union is insured by the NCUSIF.

-And finally, here’s a link to an NCUSIF calculator you can use to determine your coverage at your credit union.

Second type of coverage, the SIPC.

First off, if you own stocks, bonds, mutual funds or ETFs, and hold them at a brokerage firm, it’s important to understand that the firm cannot access your investments for company purposes, they are simply storing them for you.  If Fidelity, Vanguard or Charles Schwab were to go out of business for any reason, you would still own your investments and it’s likely that they would be transferred to another large brokerage firm. That being the case, and even though brokerage firm failures are rare, I do think it’s important that you always use a broker that is a member of SIPC. The Securities Investor Protection Corporation (SIPC) is a nonprofit organization established by Congress to protect investors from losses resulting from the failure of brokerage firms.  The SIPC coverage protects the securities and cash in your brokerage account up to $500,000. The $500,000 protection includes up to $250,000 protection for cash in your account if it isn’t already covered by FDIC. SIPC coverage only kicks in when an SIPC member goes bankrupt or becomes financially troubled and, in a worst-case scenario, customer assets are missing. Some brokerage firms offer extended coverage beyond SIPC.

Information on SIPC…

You can use this link if you’re interested in confirming whether your brokerage firm is covered by SIPC.

Click here if you’re interested in reading more about how the SPIC works.

And here’s a link to a description of how SIPC might cover the different accounts you have at a brokerage firm.

Information on Charles Schwab…

At Beacon, we use Charles Schwab to hold our client’s investments. Schwab is a member of SIPC and also provides additional coverage through Lloyd’s of London and other London insurers. That coverage, when combined with SIPC coverage, provides protection of securities and cash up to an aggregate of $600 million, and is limited to a combined return to any customer from a Trustee, SIPC, and London insurers of $150 million, including cash of up to $1,150,000. This additional protection becomes available if SIPC limits are exhausted.**

Click here for information on Charles Schwab’s SIPC and extended coverage.

Or here to read Schwab’s perspective on the recent industry events as written by Charles Schwab, Schwab’s Founder and Co-chairman and Walt Bettinger, Schwab’s  CEO and Co-chairman.

There’s a lot going on in the world right now. If you’re a Beacon client, you can rest assured that we will continue to stay informed for you and alert you to any necessary changes to your plan or portfolio. In the meantime, please feel free to reach out to us if you you’re feeling concerned or have questions.

Important notes…

At Beacon, we are not bankers, nor are we SIPC or FDIC attorneys (I feel confident there is such a thing, however.)

The content above is for informational and educational purposes only. The links and graphs are being provided as a convenience; they do not constitute an endorsement or an approval by Beacon Wealthcare, nor does Beacon guarantee the accuracy of the information.

*These deposit insurance coverage limits refer to the total of all deposits that account owners have at each FDIC-insured bank. The listing above shows only the most common ownership categories that apply to individual and family deposits and assumes that all FDIC requirements are met.

**Information from Schwab.com