When an economic crisis hits and the stock market plunges, people get fearful about their money and how to keep it safe. If you have a retirement account, such as a traditional IRA or a Roth IRA, you may be thinking, is it protected by FDIC insurance?
To back up, the Federal Deposit Insurance Corporation (FDIC) is a government-run agency that provides protection against losses if a bank or savings and loan association fails. Created in 1933, the FDIC's original mission was to offer peace of mind to banking customers after the crash of the stock market and financial disaster, including bank runs, that began in 1929.
While the coverage itself has changed over time, the FDIC has remained true to its initial objective of keeping banking customers safe from losing money in deposit accounts—currently up to $250,000 per depositor, per bank, for each type of account. The insurance covers customer deposits at FDIC-insured banks, including those held in checking accounts, savings accounts, money market deposit accounts, and certificates of deposit (CDs). The FDIC has assured consumers that during an economic crisis, FDIC-insured banks are the safest place to keep their money.
So far, so good. But to answer the original question: Not all traditionalIRA and Roth IRA accounts are treated in the same manner by the FDIC. Here's why.
Key Takeaways
- FDIC insurance covers customer deposits held at FDIC-insured banks or savings and loan associations, including such assets held in IRA accounts.
- Deposit accounts such as checking and savings accounts, money market deposit accounts, and certificates of deposit can all be held in either traditional IRAs or Roth IRAs.
- The limit on FDIC insurance is $250,000 per depositor, per institution, so it is important to know how much money you have in different accounts within one institution to be sure your funds are fully covered.
Types of IRAs Covered
An IRA, whether Roth or traditional, is an individually held retirement account that carries with it specific tax benefits and contribution and distribution restrictions. IRAs were created in an effort to help individuals accumulate savings to be used during their retirement years.
Traditional IRA and a Roth IRA differ in terms of when you get a tax break. The former offers an upfront benefit—you can write off contributions from your taxable income—while the latter requires you to postpone your tax break until retirement.
But both provide considerable flexibility when it comes to how you're able to invest. Savings IRAs, for instance, contain depository accounts—checking and savings accounts, money market deposit accounts, and CDs—all of which are covered under the FDIC. Suppose you go to your local FDIC-insured bank and open a CD IRA. Your balance would be protected up to $250,000, the per-bank limit for each account type.
Accounts Not Covered
While the FDIC provides coverage to deposit accounts held within a traditional or Roth IRA at an FDIC-insured financial institution, not all IRA accounts fall into this category. Saving for retirement can be a daunting task, and the IRA annual contribution limits can make it an even greater challenge.
To combat this, IRA account-holders are allowed to invest in securities in an attempt to earn a higher rate of return than what may be offered by conservative bank products. Investments held in a traditional or Roth IRA can include mutual funds, exchange-traded funds (ETFs), individual stocks, bonds, or annuities.
Because each of these investments is based on market performance, the individual who holds these non-bank securities in an IRA account bears all the risk if the securities lose value over time. The FDIC does not insure such investments held within a traditional or Roth IRA, even if the account was established and trades were placed through an FDIC-insured institution.
FDIC Coverage Limits
The FDIC increased the amount of coverage on deposit accounts for banking customers in the wake of the Great Recession that began in 2007. For an individual account, the FDIC provides insurance protection up to $250,000, per depositor, per FDIC-insured bank, per ownership category. The FDIC spells out these ownership categories here.
It is possible to have more than $250,000 of deposit insurance coverage at one FDIC-insured bank because different ownership categories (such as single, joint, and certain retirement accounts) are separately insured.
If, for instance, a banking customer has a certificate of deposit with a value of $125,000, and a money market deposit account with a value of $215,000 at the same institution, and both are in the same name, their account balances are added together and collectively covered by the FDIC—up to $250,000 (even though they total $340,000). So, in this scenario, $90,000 of their money is uncovered in case of a bank failure. The same limits are applied for checking and savings accounts held at FDIC-insured financial institutions.
The FDIC also offers insurance protection up to $250,000 for traditional or Roth IRA accounts. Again, all your IRAs are combined for insurance purposes. If the same banking customer, for example, has a certificate of deposit held within a traditional IRA with a value of $200,000 and a $100,000 savings account held in a Roth IRA at the same institution, the accounts would collectively be insured for $250,000; $50,000 is left exposed.
However, IRA deposit accounts and non-IRA deposit accounts fall into different classifications, which means that they are insured separately—even if held at the same financial institution by the same owner. That means if our customer's accounts consisted of an IRA (holding a CD) worth $200,000 and a regular savings account worth $100,000, they would both be insured up to $250,000—meaning that, if the bank failed, they would be reimbursed for their full $300,000.
Does the FDIC Insure IRA Balances?
Investment and insurance assets held within an IRA are not federally insured, so they can absolutely lose value during a market downturn. But traditional banking products like CDs and money market accounts are FDIC-insured at most banks, even when contained in an IRA.
Does the FDIC Insure My Full Account Balance?
Currently, the FDIC protects up to $250,000 per depositor, per bank, per ownership category. If one person owns a savings account at a particular bank in excess of that amount, the excess portion would not be covered by the FDIC. The $250,000 limit applies to the total balance of all IRA deposits held by one individual at a particular bank.
What Is the Role of FDIC Insurance?
FDIC coverage protects your deposits in the event of a banking crisis. This insurance is paid for by the bank, not its customers. Should a bank fall into trouble, the government agency either provides you with an account at another insured bank or cuts you a check for the balance for which you're insured. According to its website, the FDIC usually provides these benefits within a few days of a bank's failure.
The Bottom Line
Savings IRAs may not offer the greatest growth potential, but they do come with FDIC insurance at most banks. As a result, you're guaranteed not to lose the insured portion of your principal in the event of a banking crisis. Investment and insurance assets held within an IRA don't offer that same level of security.
