Just How Safe is Your
Money?
The volatile markets and
economies around the world, with large banks collapsing on a
regular basis, have many people wondering how safe their money
is.
Banks and the FDIC Most
Americans are familiar with FDIC-insured banks. The Federal
Deposit Insurance Corporation is a U.S. government corporation
which guarantees the safety of most account types in banks that
are members. Currently, accounts are protected up to $250,000
per depositor per bank for CDs, checking, savings, retirement,
money market, and a few other account types. Some things that
are not guaranteed at your FDIC bank include stocks, safety
deposit boxes, stocks, and several others. Believe it or not,
FDIC does not insure your money if it gets stolen from the
bank! Don't worry though - the bank's private insurance should
cover that.
Here is a comforting quote from
the FDIC: "Since the start of FDIC insurance on January 1,
1934, no depositor has lost a single cent of insured funds as a
result of a failure."
When Banks Fail The FDIC
responds immediately when a bank or institution fails. They
usually close the institution right away and sell their
deposits and loans to another institution. The customers of the
failed institution automatically become members of the buying
institution. The largest and most dramatic example of this is
when Washington Mutual was closed by the government in 2008.
Their assets were sold to JPMorgan Chase & Co because they
lacked sufficient liquidity to meet their obligations. All of
the customers and their insured accounts remained safe and
protected.
Credit Unions and the NCUA
Credit unions appear to operate the same as banks from the
outside but inside they are a little different. They are
actually owned by the members of the credit union, not
shareholders like banks are. Therefore, the FDIC does not
insure credit unions. Instead, the National Credit Union
Administration takes care of that. The NCUA is an independent
federal agency that supervises, charters, and insures federal
and most state-chartered credit unions around the United
States.
Much like the FDIC, the NCUA
insures most "share" accounts of member credit unions up to
$250,000, at least through 2009. However, if you have multiple
accounts they are usually added together to see if you are
below the $250,000 limit. Certain retirement accounts are
insured separately, also to $250,000. There may be other
account types or benefits offered by the credit unions which
may not be covered by the NCUA.
When Credit Unions Fail Failure
rates among credit unions are low, with maybe a dozen failures
per year, and the NCUA maintains a healthy surplus of funding
to rescue failed credit unions. However, when one does fail,
the NCUA will supervise the sale of the failed institution to a
healthy one in much the same way the FDIC handles failed banks.
Your accounts are still insured and taken care of through this
process.
Investment Accounts and the
SIPC Most investment companies in the United States are members
of the Securities Investor Protection Corporation. All SIPC
accounts are protected up to $500,000 but only $100,000 of that
can be in cash. Some companies also purchase additional
insurance to give you more protection. If one of these
companies fails, your account should be just fine. Keep in
mind, though, the SIPC does not cover against market
losses.
401k Retirement Accounts If the
company that administers your 401k retirement account goes
under, will your money be safe? For example, if Fidelity or T.
Rowe Price goes bankrupt, what would happen to your money? It
depends on what type of insurance they carry. Perhaps it is
FDIC, NCUA, or SIPC. Perhaps they carry some sort of private
insurance. In most cases, though, there should be plenty of
insurance to cover your account in case that company fails.
Also, the actual funds for the 401k are usually placed in a
trust so that if the company fails, the government will step in
and make sure those funds are taken care of properly. Please
check with your institution to be sure.
Conclusion In conclusion, as
long as your money is kept in a federally-insured account then
you should have nothing to worry about. Of course, if any of
your accounts are based on the market, such as stocks or mutual
funds, they could fluctuate up or down or even go down to zero.
But what this article is concerned about is when the financial
institution itself fails.
About the author: Nicholas
Swezey is the creator of the Stock Picker at
HowTheMarketWorks.com.
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