Portions of your IRA may be protected by the Federal Deposit Insurance Corporation (FDIC). That will include any depository accounts that you hold in a depository institution, such as savings accounts or certificates of deposit with a savings bank. But this protection will not apply to investments, securities or any other IRA portfolios you hold elsewhere. Most notably this includes any sections of your IRA that hold assets like stocks, bonds or funds. Here's what you need to know.
A financial advisor can help you answer questions about protecting your retirement investments.
What Is the FDIC?
The FDIC is an independent agency of the federal government that protects money you put in the bank. If an insured bank fails, the FDIC will reimburse its customers for their losses up to each individual's insurance limit. At time of writing, that limit was $250,000, and Congress periodically raises it.
This protection applies to what are known as "depository institutions," meaning banks that hold money on account for their customers. The standard form of a depository institution is a savings bank that customers use as a safe place to store their money. It does not apply to investment banks, meaning banks that buy, sell or hold financial securities.
This protection also only applies to what are known as depository products. These are banking products in which the bank holds your money and pays, at most, a predetermined interest rate. Common depository products include checking accounts, savings accounts and certificates of deposit.
The FDIC does not insure investment products and financial securities. Common examples of a financial security include stocks, bonds and investment funds, none of which are insured against loss.
Sections of an IRA the FDIC Protects
Father and daughter study the family's holdings
The FDIC does cover some retirement accounts. Specifically, if a retirement account meets the following criteria, the FDIC will cover its losses in the event of a bank failure:
The account must be self-directed
The account must be held at an FDIC insured depository institution
The account must hold FDIC insured assets
Self-directed accounts are portfolios in which the owner, not a plan administrator, directs how the funds are invested. This includes IRAs and Roth IRAs, along with several other types of retirement accounts such as SEPs and self-directed 401(k) plans. It does not cover standard defined benefit accounts or managed defined contribution accounts such as an ordinary 401(k).
To receive insurance coverage the IRA must be held with a depository institution such as a savings bank. Only FDIC-insured assets are covered, such as certificates of deposit or savings accounts. These two requirements generally overlap as it is rare, if ever, that a depository institution can legally offer non-FDIC insured assets.
Individuals receive protection up to the $250,000 limit for their combined IRA and Roth IRA holdings at each insured depository institution.
For example, say that Roger invests with a local savings bank. He has an IRA with $150,000 in certificates of deposit and a Roth IRA with another $150,000 in high-interest savings. These accounts would be insured by the FDIC. Since Roger has $300,000 on deposit (the IRA plus the Roth IRA) he would receive the FDIC's maximum coverage amount of $250,000 in case of loss.
Sections of an IRA the FDIC Does Not Protect
The FDIC will not insure any IRA portfolios that do not meet the criteria above.
Most individuals keep their retirement accounts, including IRAs and Roth IRAs, with an investment institution such as a broker or an online broker. These accounts would not receive FDIC protection, as they are not held with an insured depository institution.
In addition, the FDIC only protects qualified depository assets. This means they don't protect securities or other speculative financial products such as stocks, bonds, annuities, ETFs or mutual funds. As above, most individuals build their IRAs and Roth IRAs based on securities because they want the growth they can get from those products. While this is typically a sound plan, the FDIC will not protect those holdings.
It's important to note that the FDIC does insure qualified accounts regardless of an individual's other holdings. For example, say that Alicia has an IRA account with an insured depository institution holding $150,000 in certificates of deposit. She also has a Roth IRA with a brokerage holding $200,000 in stocks. The FDIC would not protect her Roth IRA from losses, because it holds non-covered assets in an uninsured institution. However it would protect her IRA from losses, because it holds covered assets with an insured depository institution.
Bottom Line
Couple evaluates various Roth IRAs
If you hold your IRA or Roth IRA with an FDIC-insured depository bank, and if that account holds qualified depository assets, it will receive FDIC coverage. Any sections of your portfolio that you hold with a non-depository institution, or which are invested in securities and other non-banking assets, will not receive FDIC protection.
Retirement Planning Tips
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An IRA gives account holders maximum flexibility, allowing you to manage the account on your own. However, this benefit shouldn't keep you from using other retirement savings accounts, like a 401(k). 401(k)s are usually available through your employer, with some employers even offering matching contributions.
