How Your Money Is Protected
Given the recent headlines around bank failures, now is an excellent time to revisit how your money is protected.
Two government agencies were designed to protect investors from bank failure and brokerage insolvency. First, we will highlight The Federal Deposit Insurance Corporation (FDIC), which covers commercial banks. Then we will discuss the Securities Investors Protection Corporation (SIPC) which protects assets held at broker-dealer firms. If you are a member of a Credit Union, just like banks, they are federally insured. But instead of the FDIC, they are covered by the National Credit Union Administration (NCUA) with the same limits.
The FDIC is an independent government agency that since 1933, has been insuring member bank customer deposits dollar-for-dollar (up to the insurance limit) backed by the full faith and credit of the government. Any instrument that can be held in a savings or checking account, such as cash, certificates of deposit (CDs) cashier's checks, money orders, money market deposit accounts (MMDAs) and other official items issued by banks are covered. Depositors have never lost a dime of their FDIC-insured deposits.
Coverage limits vary by account type, but the standard insurance amount is $250,000 per owner, per bank, for each ownership category. For example, a joint account with two owners is protected up to $500,000. A trust account with one owner and five or fewer beneficiaries is insured up to $250,000 per beneficiary. The coverage formula changes for trust accounts with more than one owner and more than five beneficiaries, but the account is still protected.
Cash instruments in retirement accounts such as but not limited to IRAs (Traditional, Roth, SEP, SIMPLE) at the same bank are insured up to $250,000. However, by utilizing multiple bank charters, the Schwab and TDA IDA Bank have been structured to provide clients with FDIC insurance of up to $500,000 per depositor in each recognized legal capacity (e.g., up to $500,000 for individual accounts and $1 million for joint accounts) mentioned above.
FDIC coverage is not just limited to accounts at commercial banks. For example, if a client had $1 million in a brokerage account they wanted to invest in CDs, they could buy four $250,000 CDs from four different banks, and each would be protected.
The Securities Investor Protection Corporation (SIPC) is a non-profit entity created by Congress in 1970 that protects clients' accounts in the rare event of a broker-dealer's insolvency. It is important to note that SIPC does not protect against market loss. Accounts are protected up to $500,000, which includes a $250,000 limit for cash. However, Charles Schwab and TD Ameritrade have supplemental insurance that covers amounts well beyond SIPC limits. For example, Schwab offers $150 million of additional insurance for securities and up to $1.15 million for cash balances once SIPC limits are exhausted. The additional insurance coverage amounts at TDA are similar.
It is worth mentioning that unlike CDs, money market mutual funds (as opposed to MMDAs discussed earlier) are securities, meaning they fall under SIPC rules. Therefore, they are not covered by FDIC insurance. While not as safe as cash—which is why they currently pay an attractive dividend--investors often treat them as such. Nevertheless, when viewed along the investment spectrum, they are considered low risk. In the history of money market mutual funds since 1971, only a handful have "broken the buck, " meaning the value fell below the $1 net asset value (NAV) they strive to maintain.
A typical money market fund exchanges investor cash for collateral in the overnight lending market. Funds that accept government paper are considered safer since the collateral is backed by the full faith and credit of the US government, and this market is very liquid. Funds that accept different types of collateral, such as commercial paper and other short-term instruments, have slightly more risk since they lack full faith and credit backing. As a result, the dividend they pay is typically slightly higher.
There will undoubtedly be changes to how money is protected and the limits of this protection once the dust has settled and all the details surrounding recent events are known. Rest assured, we are paying attention and will react accordingly.
If you have specific questions not addressed in this short overview or would like further explanation of a point, don't hesitate to contact us. We are happy to have a conversation anytime.
Written by author: Jarrod Jacobi | Senior Financial Advisor | AWMA®
*The foregoing content reflects the opinions of Van Hulzen Asset Management DBA "Van Hulzen Financial Advisors" and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.