Are most IRAs FDIC insured?
I am being offered an employer match IRA, However, I just received an email from an institution with a Disclaimer that the IRA is not FDIC insured and may lose money. I thought all retirement instruments are FDIC insured. What should I do?
An IRA is a type of an account. You have a choice of where you would like to invest the funds within your IRA which may or may not be FDIC insured. If you are looking for FDIC insurance in your IRA then CDs may be a good choice for you.
- An Individual Retirement Account (IRA) is a tax deferred account available for anyone of any age as long as you have earned income. Once you open your account, you may invest the funds in your IRA in, but not limited to stocks, bonds, mutual funds, and/or even CDs. An IRA is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis. A traditional IRA is tax deferred which you make contributions with money you may be able to deduct on your tax return, and any earnings can potentially grow tax-deferred until you withdraw them in retirement.
- A Certificate of Deposit (CD) is a type of fixed interest rate deposit over a specified period of time. When that term ends, you can withdraw your money or roll it into another CD. Withdrawing before maturity can result in a penalty. It is low risk and low return. CDs are among the safest investment a person can make. The interest rate is determined ahead of time, and you’re guaranteed to get back what you put in, plus interest once the CD matures. What’s more, if the bank fails or goes under, your deposit is most probably insured by the FDIC for up to $250,000.
The difference being that an IRA is a type of account in which you may leave in cash or invest in different securities or CDs. Whereas a CD is a time deposit at a financial institution which may be bought in either a qualified (IRA) account or a non qualified (cash) account that has FDIC insurance.
Unlike the accounts you’re familiar with, checking, Savings, CD, etc., an IRA can be invested in a stock market. Thus, it can’t be insured by the FDIC. Furthermore, the IRA is aimed to provide the retirement income you need, which may be a couple of decades away. Hence, it should be invested at all times with occasional shifts towards bonds/cash due to the market condition. As you get older, your cash position may get bigger than the stocks, but you may still want to allocate enough in the stock position to hedge the inflation.
To summarize: your savings in the checking/savings account is used for the daily/monthly planning, thus it should be in a safe place where you can access at a moment notice and without losing the principal. That’s why those accounts are FDIC insured. As for the IRA, you should consult with a professional to guide you best allocate the money for your retirement growth. Best!
Only bank accounts are FDIC insured, so the degree to which an IRA would have FDIC insurance, depends on if the IRA is simply a bank account registered as an IRA, which it is likely not. In addition, FDIC has only about 6 cents on reserve for every $100 on deposit. It would take you ten years to get your money back, making it completely useless for any protection it is supposed to provide.
If you are getting involved in an employer match situation, you are stuck with the options it provides, which are likely to be in mutual funds or an annuity which invests in mutual funds. If you are concerned about loss, stick with more conservative options. Just be aware that if our economy corrects significantly, even a money market account could see a loss in value.
BANKS and SAVINGS accounts only i.e. Checking Accounts, Certificates of Deposit and Indexed Certificates of Deposits. However, IF in a brokerage or advisory account, the consultant has a choice to have ALL CASH not invested in a FDIC Money Market or IDA [Insured Deposit Account]. BUT the investments within a brokerage ARE NOT protected by FDIC.
FDIC insurance is provided Banks and only covers deposit products (CD, Savings). FDIC insurance protects you from Bank failure.
All bank that provide investment securities thru a brokerage department are required to give the disclaimer "Not FDIC Insured" so the investor is not given the impression FDIC covers the investment.
Brokerage accounts are covered by SPIC and protects the investor from Brokerage failure.
Neither FDIC or SPIC coverage is designed to guarantee the principal amount invested.
You need to sit down with the Broker that your employer is using to establish this account and have the investment options reviewed so you can select the type of investment that best suits your risk tolerances. The good news is that your employer is matching a portion of the investment and that will give you an immediate return on your investment.
Best of Luck with this new account.