The failure of several banks in early 2023 raised fears among many individuals and businesses that their cash deposits were at risk. Most depositors were covered by FDIC insurance but others were not. The best way to protect your cash holdings is to understand the rules governing bank deposits and how you can mitigate any potential losses.
What Are the Current FDIC Coverage Limits?
The FDIC provides insurance for bank deposits up to $250,000 per depositor, per insured bank, for each insured account “ownership category” (ex. individual, joint, IRA, etc.). For example, if you are the sole owner of a checking account, savings account, and money market account at the same bank, the balances of those three accounts are combined and insured up to the “per depositor” limit of $250,000. However, if you also have a joint account with your spouse, the joint account is separately insured up to $500,000 because it’s a different ownership category and each of you gets $250,000 of coverage for this account.
There are several caveats. First, it is important to confirm that your bank is FDIC insured because not all banks are covered. Further, not all account types are insured. If you have multiple accounts at the same financial institution, you should consult with your banker to verify your coverage.
Why Is It Important to Understand FDIC Insurance?
In the event of a bank failure, you want to ensure that your money is safe. If you have uninsured funds in the bank, there is a chance that you could lose them. That could significantly jeopardize your personal finances. If you have a business, cash losses can hinder operations, and cause your business to default on other obligations, or even result in the closure of your company.
Fiduciaries, such as trustees, must take additional care because of their position of trust. The failure to protect assets by neglecting to place them in an FDIC-insured account can result in a breach of fiduciary duty claim and personal liability for the fiduciary for any losses.
How Can You Protect Your Excess Cash Deposits?
The most common way to secure cash deposits if you are over the FDIC limit is to open accounts at different banks to ensure that you do not exceed $250,000 at any one bank. However, this may become unwieldy if you would need to open a large number of accounts to stay under the threshold.
Another option is to consider alternative account options that can maximize your coverage at a particular bank, such as the following:
- IntraFi Network Deposits (formerly Certificate of Deposit Account Registry Service, or CDARS), is a network of banks that insures money. You invest money in an IntraFi bank and that money is divided into multiple accounts held at participating IntraFi banks. Each account is protected by the $250,000 FDIC limit and is managed centrally by the depositor’s “home” bank, thus easing the administrative burden of managing multiple accounts.
- Cash management accounts with a sweep feature operate like a checking account to pay bills but cash deposits can sweep into multiple bank accounts at different banks to stay within the $250,000 limit.
If you have more than the FDIC-insured amount in any one financial institution, you should talk with your banker about the best way to protect your deposits.
