Understanding Protections for Your Bank and Investment Accounts
Learn what safeguards your bank and investment accounts should have in the event of an institutional failure, with important protections from the FDIC, NCUA, and SIPC for your hard-earned funds.
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As we work toward financial freedom, we naturally spread money across different accounts with different financial institutions, like banks, brokerage firms, and insurance companies.
Fortunately, it's not common, but financial institutions can and do fail. Understanding the protections available for different types of accounts is crucial for protecting the assets you've worked hard to accumulate. This way, you'll have an easier time figuring out what to do if a company you do business with does fail. Here are a few types of accounts and the protections you should have with each.
Bank and Credit Union Balances
Your deposits at many banks and credit unions are safeguarded against bank failure with coverage of up to $250,000 per institution. The Federal Deposit Insurance Corporation or the National Credit Union Administration automatically insures deposit accounts at enrolled banks and credit unions.
The most common types of accounts are covered, including checking accounts, savings accounts, and certificates of deposit (CDs). Stocks, bonds, mutual funds, and other types of financial products aren't covered, even if the bank is insured.
You can increase coverage above $250,000 by opening a different type of account based on account ownership. For example, a single owner account, joint account, and revocable trust would each have $250,000 in coverage.
Investments With Brokerage Firm
Your investments should be protected from brokerage firm failure by the Securities Investor Protection Corporation (SIPC), which provides up to $500,000 in protection, including up to $250,000 in cash balances.
SIPC insurance specifically covers securities held at a brokerage firm including stocks, bonds, CDs, and mutual funds. Losses incurred due to market fluctuations, investment fraud, or bad advice aren't eligible for insurance. Additionally, futures contracts and currency aren't covered by the SIPC.
401(k) Plans
If you have a self-directed defined contribution plan, you're in luck—it's FDIC-insured. Or, if a portion of your 401(k) is held in a money market account or CD at an FDIC-insured bank, that amount is eligible for FDIC protection. Other accounts you have at the same bank with the same ownership category count toward your total coverage.
FDIC insurance doesn't apply if your 401(k) is invested in securities like stocks, bonds, or mutual funds. Instead, SIPC protection applies when the brokerage account holding these accounts were to fail.
Treasury bonds
Treasury bonds, which are backed by the full faith and credit of the U.S. government, are generally considered to be one of the safest investments. This means investors can expect to receive the full value of their investment, including any interest owed, when the bond matures as long as the U.S. government doesn't default on its debt (it never has).
College Funds
While most 529 plans offer options like mutual funds or exchange-traded funds (ETFs), a handful of states offer FDIC-insured options for 529 plans. This means your plan contributions are protected like bank deposits.
The likelihood of a 529 plan failing is low, but if your plan sponsor becomes insolvent, your state's insurance guaranty association may step in to provide some degree of protection. Check with your state's insurance board to learn what protections are provided where you live.
Life insurance policies
Life insurance isn't covered by the FDIC, but you may have protection through your state's State Life and Health Guaranty Association. Specific policies and limits vary from state to state. For eligible policies, the insurance guaranty associations pay out policy benefits up to a certain limit if an insurance company is unable to meet its obligations.
Health savings accounts (HSAs)
HSAs held at a bank or credit union as a single account or revocable trust may be insured by the FDIC or NCUA within normal coverage limits. Note, however, that only deposits above the deductible of a high-deductible health plan (HDHP) are eligible for FDIC or NCUA insurance. On the other hand, if your HSA is invested in securities at a brokerage firm, SIPC coverage applies instead.
Mobile payment system
Protection for cash balances on a mobile payment system varies by platform. Some of the biggest payment systems have bank partnerships that provide FDIC coverage for your cash balances. Reviewing the Terms and Conditions of each platform can help you understand whether you're covered and by how much. In some cases, it may be safer to transfer your money to a bank account to be sure you're covered.
Bottom Line
Account protections and coverage levels are subject to change over time. Verifying coverage levels with your financial institution periodically can help you stay up-to-date with the most current information. Keep in mind that any insurance applies to failure or insolvency, not losses due to market fluctuations.
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LaToya Irby is a financial writer with over 14 years of experience. She's been quoted and published as a credit expert in several major publications including USA Today, U.S. News and World Report, TheBalance.com, and The Chicago Tribune.