Safety is a hallmark of the traditional certificate of deposit (CD) sold by a bank or credit union. Investors seeking a low-risk investment expect that many CDs, when held to maturity, will return the full amount of the original investment, even if the institution issuing the CD collapses. A federally-insured bank CD has the backing of the Federal Deposit Insurance Corporation (FDIC), and CDs at credit unions are often guaranteed by the National Credit Union Administration (NCUA). Of course, these institutions have limits on what they will insure. As of 2011, the FDIC insured up to $250,000 in a single account.
The well-publicized government bailout bill that passed in October 2008 prompted an increase in the FDIC's insurance cap from $100,000 to $250,000. The FDIC will only be required to cover $250,000 per insured account. Because the increased limit could increase any time in the future it would be advisable to seek out the current coverage at fdic.gov, this tutorial will presume an insurance coverage limit of $250,000 for an individual account.
The FDIC and NCUA offer more protection for retirement accounts than individual accounts. CDs held in an individual retirement account (IRA) are insured up to $250,000. Accounts set up under a different set of provisions, such as a trust, can be covered to a higher amount. A trust with three beneficiaries, for example, can hold up to $750,000 in insured deposits. (Get the most out of your retirements savings, read 11 Things You May Not Know About Your IRA.)
Joint insured accounts have a limit twice that of individual accounts: $500,000. A married couple with a joint account and individual accounts can receive $1,000,000 of insurance for their deposits. Add the limit of the couple's joint account to the limit of each individual account ($500,000 + $250,000 + $250,000 = $1,000,000).
Investors without joint accounts can increase their total coverage by opening CDs at multiple institutions. Putting $250,000 in each of three banks, for instance, yields $750,000 of coverage. The married couple from the previous example can benefit from accounts at multiple institutions by setting up $1,000,000 in insured accounts at one bank (two individual accounts and one joint account) and then doing the same thing at a different bank or credit union. By investing through multiple institutions, it is possible to deposit an insured amount of money limited only by the number of financial institutions involved. Keep in mind that each set of accounts must be at different financial institutions, not at a different branch office of the same institution. (Find out how CDs hold up when the market it down; read Are CDs Good Protection For The Bear Market?)
Investing in more than one bank or credit union also provides an opportunity to invest larger covered amounts. For example, if Juan has $1,000,000 to invest in CDs, but doesn't want to put all of the money into one account because the insurance will cover only up to $250,000, he can split the $1,000,000 into $250,000 increments and invest them separately in four different institutions. This way, his entire $500,000 is covered.
If opening multiple accounts is impractical, there is another option. The Certificate of Deposit Account Registry Service (CDARS) offers up to $50 million in FDIC insurance coverage with a single bank deposit. The bank spreads the money across multiple institutions participating in the CDARS program.
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