Last Updated: November 1, 2008
The news has been filled recently with stories about bank failures and weaknesses in all areas of the financial system. If you have a variety of accounts at your neighborhood federally insured bank or credit union, it makes sense to review your balances and whether they're within the limits of federal insurance.
According to FDIC data released in late August the number of troubled U.S. banks jumped to 117 — the highest level in about five years — during the second quarter, up from 90 in the prior quarter. Bank profits plunged 86 percent during that quarter, the FDIC said. By August, 10 U.S. banks had failed. Many of these failed banks were sunk by failed mortgage loans. Third-quarter data is expected by year-end.
It's also a good idea to review those assets as part of your overall portfolio to see whether your holdings are properly allocated against stocks, bonds and other relevant investments to meet your goals. A financial planner can help you review your assets to ensure the mix is right on target, and to make sure you're well within federal insurance limits on the accounts you have.
For non-retirement accounts — typical savings and checking accounts, for instance — the Federal Deposit Insurance Corp. or the National Credit Union Administration limit remains at $100,000. For certain retirement accounts, such as bank-issued individual retirement accounts (IRAs), the limit is higher — individual accounts are federally insured up to $250,000 per institution, a limit it raised from $100,000 in 2006.
The $250,000 limit applies to traditional and Roth IRAs, Simplified Employee Pension (SEP) IRAs and savings incentive match plans for employees (SIMPLE) IRAs that are held within these institutions by employers as well as individuals. Self-directed defined contribution plans (including Keogh plans and 401(k) plans) are also included under this limit. Under the FDIC/NCUA rules, all of an individual's retirement accounts at the same insured institution are added together and insured up to $250,000. It's also important to know that these retirement account insurance limits are separate from any other deposits the individual has at the same institution.
Certain revocable trust accounts may also be entitled to FDIC insurance coverage for up to $100,000 for each qualifying beneficiary properly named by the trust account owner. Under revocable trust accounts, insurable categories include: payable-on-death (POD) accounts, which are also known as testamentary or Totten Trust accounts; and living trusts. It's important to note the following when determining whether such accounts will be insured:
- The owner's spouse, child, grandchild, parent, or sibling as well as adopted children and stepchildren, grandchildren, parents, and siblings also qualify for insurance coverage. In-laws, grandparents, great-grandchildren, cousins, nieces and nephews, friends, organizations (including charities), and trusts don't.
- The account title must indicate the existence of the trust relationship by including a term such as payable on death (or the acronym POD), in trust for (or the acronym ITF) trust, living trust or family trust.
- For POD accounts, each beneficiary must be identified by name in the bank's account records.
So what happens if you find the amount you have at any bank for your retirement accounts exceeds the $250,000 limit? First, you should review your holdings to determine if you are holding too much in cash. This is why it's particularly useful to discuss this situation with a financial planner. And moving those assets requires special care. Moving retirement assets from one institution to another requires proper procedure so you don't risk owing income tax on that money or withdrawal penalties.
While you can withdraw funds and transfer the money to a new institution within the legal rollover window of 60 days, you can do this only once from the originating IRA in a 12-month period, so make sure you do all the transferring you plan to do at the same time. If you are younger than 59 ½ years of age, you'll risk owing income tax plus a 10 percent penalty on a subsequent withdrawal.
For non-retirement accounts, it might be wise to ask a financial planner about whether such options like brokered certificates of deposits would be a good solution. Buying multiple CDs at once through a brokerage firm can provide a speedy option to spread out money at different institutions with full FDIC protection.