An estimated $7 trillion is now parked in money market accounts, CDs, and short-term bond funds. Much of this money came from investors exiting the stock market during the past 3 years of the bear turn. While the stock market has seen improvement over the past few months, many investors remain apprehensive as stories of corporate scandals continue to unfold and geopolitical events still dominate the headlines.
Like most Americans, you probably assume that your money is completely safe, resting in your bank or brokerage account. You may be surprised, however, to find that is not the case. There are limits to the insurance coverage offered by banks and brokerage firms, and it's worth examining the rules that govern protection for investors.
First, make sure that the Federal Deposit Insurance Corporation (FDIC) insures your bank. The FDIC is an agency of the federal government and not all banks carry FDIC insurance. Next, you want to make sure that your account does not exceed $100,000, which represents the FDIC insurance limit.
Here's where it begins to get more complicated. You can actually have multiple insured accounts in the same bank as long as the legal title to each account is different. For example, John and Sue Smith could have a $100,000 CD in the name of John and Sue Smith, $100,000 in the name of John Smith, $100,000 in the name of Sue Smith, and 2 separate IRAs for $100,000 each in the names of John Smith and Sue Smith.
This $500,000, which is held in the same bank, would be covered by the FDIC. However, if 1 of the accounts held $150,000 instead of $100,000, the $50,000 over the limit would not be covered. If the bank failed, the customer would become a general creditor of the bank for the excess proceeds.
How likely is it that your bank will fail? The banking industry is highly regulated, so failures are rare. Each year, however, about a dozen banks do fail. To check on the safety rating of your bank, go to www.welchgroup.com. Click on "Cool Links" at the bottom of the home page and then click on "Highest Money Market Yields." There will be a section to search for your bank's safety rating.
When you own securities held in a stock brokerage account, they are typically held in "street name" (ie, they are actually registered in the name of the brokerage firm and not your name). Stock brokerage firms are not covered by the FDIC, but by the Securities Investor Protection Corporation (SIPC).
SIPC is supported by member firms and generally guarantees that customers of failed brokerage firms will get back their securities (up to $500,000) and cash (up to $100,000). For more information on SIPC, visit their Web site at www.sipc.org.
Many banks and brokerage firms purchase additional private bond protection to supplement coverage provided by the FDIC and SIPC. If you hold accounts that exceed the basic coverage provided, contact your bank or brokerage firm to discuss your options.
Stewart H. Welch III, founder of the Welch Group, has been rated 1 of the nation's top financial advisors by Money, Worth, and Medical Economics. He is also the coauthor of J. K. Lasser's New Rules for Estate and Tax Planning (John Wiley & Sons, Inc; 2001). He welcomes questions or comments from readers at 800-709- 7100 or www.welchgroup.com. This article was reprinted with permission from the Birmingham Post Herald.