Is Your Retirement Money as Safe as You Think It Is?

federal workers - Aubrey Lovegrove

Understanding how much risk you can endure is essential when investing in something new.

A question I received the other day from a reader had me thinking that some investors may not comprehend how much of their money is at risk. The question I was asked during an online chat held recently was about a husband and wife both having an investment and retirement accounts that were a mix of brokerage accounts, 401(k)s, and Roths, that total well over the FDIC insurance limit of $250,000. Their main concern was how much they were covered for and if their investments were insured.

To start with, the Federal Deposit Insurance Corporation or FDIC for short was created by Congress as an independent federal agency to insure bank deposits. What the reader failed to mention was precisely how their money was invested. There are several ways it could be invested, including in bonds and/or stocks, or in a certificate of deposit. A representative for the FDIC named David Barr mentioned several significant bits of information this couple should be made aware of.

Barr explained that banks are supposed to disclose that they are not insurance, even though they do sell non-deposit items. The majority of retirement accounts are in the form of certificate of deposits. With that being said, if the couple purchased annuities or mutual funds, or any number of things from the bank, even if they total less than $250,000, they would not be insured.

Non-retirement deposit accounts at the bank are insured separately from retirement accounts placed in certificate of deposits. So, for example, if you have $250,000 in retirement deposit accounts and $250,000 in individual or joint accounts, then you will be fully insured for $500,000.

There are four categories of insurance ownership which are: joint, trust, retirement, and individual. Each category is separately insured. Do not think of these as certificates of deposits, savings, or checking accounts.

Barr was able to provide an example of how insured a married couple may be. The wife in her individual accounts (including savings, checking, and certificate of deposits) has upward of $250,000. Her husband has the same in his individual accounts as well. In their joint accounts with each other, including certificates of deposits, checking, and savings, they both have upward of $500,000. In her IRA, Roth, Keogh, and other certificates of deposits, the wife has upward of $250,000. The husband also has the same in his various retirement certificates of deposits. Both the husband and wife set up a revocable trust as the other person as the beneficiary for $250,000. The total FDIC insurance after taking all this into account is $2 million.

Barr further explained that investment products offered by the banks that are not deposit accounts are not insured by the FDIC, regardless of how much money is in the account. He suggests using a tool by the FDIC called the Electronic Deposit Insurance Estimator if you are unsure if your money is federally insured. It assists customers in figuring out how much of their money, if any at all, exceeds their coverage limits on a per-bank basis.

The Securities and Exchange Commission (SEC) also provided additional information on how your money is protected:

National Credit Union Share Insurance Fund (NCUSIF) is a federal fund that insurances credit union member deposits up to $250,000 in federally insured credit unions. It is also backed up by the federal government.

 

Securities Investor Protection Corporation (SIPC) is a Congress created a non-profit organization that protects investors against the loss of their securities (like stocks and bonds) and cash that are held by an SIPC member brokerage firm. However, there is a $250,000 cash limit and a $500,000 protection limit.

 

Federal Deposit Insurance Corporation (FDIC) insures money market accounts, certificates of deposit, and savings accounts. This organization only insures deposits. The FDIC does not insurance mutual funds, securities, or other similar types of investments that thrift institutions and banks offer up.

The SIPC issued a warning that stated that investments in the stock market would fluctuate in market value. The SIPC was not created to protect people from these risks, and that is the exact reason why it does not bail out investors when the overall value of their bonds, stocks, and other investments decrease for whatever reason. SIPC replaces missing securities and stocks when it is possible to do so in a liquidation.

The Securities and Exchange Commission stated that investors may or may not be knowingly placing their securities or cash in the hands of a non-SIPC member. Firms are legally required to inform you if they are not SIPC members. SIP does not give protection to investors if they are sold valueless securities and other stocks.

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