How Safe is Your Money?
By Michael Cecere, CPA
Gray, Gray & Gray, LLP
With turmoil and uncertainty surrounding the financial markets, including bank takeovers and mergers, many people have a single overriding concern: How safe is my money?
The short answer is, “Pretty safe.” The federal government’s reaction to the current economic and financial crisis has been swift. The government has expanded and increased insurance coverage to help alleviate fears and preserve the nation’s financial institutions.
This makes it unlikely that a collapse of the banking system as happened during the Great Depression will occur. Still, it is important that you understand what kind of insurance is protecting your money. More importantly, you need to realize that, despite federal and industry insurance programs, some of your funds may still be at risk.
Federal Insurance
The Federal Deposit Insurance Corporation (FDIC) insures deposits at insured banks, including checking, NOW and savings accounts, money market deposit accounts, and certificates of deposit (CDs), up to a certain limit. Share accounts at credit unions are federally insured at similar levels by the National Credit Union Administration (NCUA).
The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you purchase these products from an insured bank. However, in September, the federal announced that it would temporarily (for one year) insure certain money market mutual fund holdings. The U.S. Treasury will insurance the holdings of any publicly offered money market mutual fund that pays a fee to participate in the program.
An Increase in Coverage
For many years, the FDIC and NCUA insured up to $100,000 per depositor per insured financial institution. Certain retirement accounts, such as Individual Retirement Accounts, were insured up to $250,000 per depositor per insured bank or credit union. However, in response to the latest financial crisis, that limit was raised to $250,000 in October, 2008. However, that emergency provision is set to expire at the end of 2009.
So if you have $250,000 or less in deposit accounts at a single insured bank or credit union, your money is fully insured.
It is important to note that FDIC and NCUA insurance covers the total amount of your deposits up to $250,000 at a single institution, and not $250,000 per individual account. Spreading your money around in several different accounts (savings, money market, checking, certificate of deposit, etc.) at the same institution will not increase your overall protection.
Additional Protection for Retirement, Joint Accounts and Trusts
The federal government provides separate insurance coverage of up to $250,000 for certain retirement accounts, joint accounts and living trusts. Traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, Savings Incentive Match Plans for Employees (SIMPLE) IRAs and Keogh plans all fall under this protection. Again, the $250,000 protection is the maximum for all accounts in a single institution combined.
Joint accounts are treated differently. Each of the holders of a joint account receives protection of up to $250,000. So if you and your spouse have a joint savings account with $500,000 on deposit, each of you is equally protected for up to $250,000.
The FDIC and NCUA also provide insurance up to $250,000 for each qualified beneficiary of a living trust.
Brokerage Accounts
If your money is held by a brokerage firm you have some protection in the form of the Securities Investor Protection Corporation (SIPC). Your cash and securities may be protected up to $500,000 (with a $100,000 limit for cash). Some brokerage firms also provide private insurance to protect assets above the SIPC limits. Check with your firm to see if this additional protection is available.
But don’t look for insurance against market losses. The SIPC does not protect against losses caused by a loss in the market value of your securities, investment contracts (such as limited partnerships) or commodities futures.
If your brokerage firm does go out of business, a court appointed trustee will sort through the remaining assets and process investor claims. But it could be months before you recover any funds. It is important that you document all transactions with your broker and keep careful records.
Depositors Insurance Fund (DIF).
Since 1934 the DIF has been insuring deposits. It insures all deposits above Federal Deposit Insurance Corporation (FDIC) limits at Massachusetts-chartered savings banks. It is a private, industry-sponsored insurance fund.
Depositors automatically receive this added insurance benefit at no cost whenever they make a deposit to a new or existing account at a DIF member bank. All DIF member banks are also members of the FDIC. The combination of FDIC and DIF insurance provides Massachusetts-chartered savings bank depositors with full deposit insurance on all their accounts. You can visit the website, www.difvxs.com, to review a list of participating Massachusetts chartered banks.
We are in the midst of turbulent economic times, keeping your money safe is not something you want to leave to chance.
Michael Cecere, CPA is a partner with the accounting firm of Gray, Gray & Gray, LLP, Westwood, MA. He can be contacted by telephone at (781) 407-0300, or via email at: mcecere@gggcpas.com.