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 that's a traditional IRA or a Roth IRA, you may be wondering, is it protected by FDIC insurance? Here is what you need to know.
- 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, for each account ownership category, 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.
What Is the FDIC and What Does It Do?
The Federal Deposit Insurance Corporation (FDIC) is an independent federal 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 and bank failures, 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, per ownership category (such as individual or joint). 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.
But not all traditional IRA and Roth IRA accounts are treated in the same manner by the FDIC. It depends on their type and the financial institution where they are held.
In March 2023, Silicon Valley Bank in California and Signature Bank in New York collapsed and were taken over by the FDIC. In a joint statement, the FDIC, U.S. Treasury Department, and Federal Reserve announced that the government would waive the normal $250,000 FDIC limits and cover the full value of customers' deposits. Whether that policy will apply in any future bank failures is unknown.
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 IRAs and Roth IRAs differ in terms of when you get a tax break. The former offers an upfront benefit—you can generally deduct your contributions from your taxable income—while the latter provides a tax break after you begin to make withdrawals, typically in 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 by the FDIC at member banks. If, for example, 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. For example, IRA investments held in mutual funds, exchange-traded funds (ETFs), or individual stocks are not covered.
In those cases, the individual bears all the risk if the securities lose value. That is true even if the account was established and trades were placed through an FDIC-insured institution.
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.
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.
If, for instance, an individual 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 their name only, their account balances are added together and collectively covered by the FDIC for 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 at one institution 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. So if our customer's accounts consist of an IRA (holding a CD) worth $200,000 and a regular savings account worth $100,000, they would each be insured up to $250,000—meaning that, if the bank failed, they would be reimbursed for their full $300,000.
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 banks, not their customers or the taxpayer. Should a bank fall into trouble, the FDIC 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 funds within a few days of a bank's failure.
Does the FDIC Insure IRA Balances?
Traditional banking products, like CDs and money market accounts, that are held in an IRA are FDIC-insured at most banks, up to certain limits. However, mutual funds and other types of securities are not insured by the FDIC.
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 has 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 also applies to the total balance of all IRA deposits held by one individual at a particular bank.
Are Credit Union Accounts Insured by the FDIC?
No, but credit union accounts have similar insurance protection provided by the National Credit Union Administration (NCUA).
The Bottom Line
Bank-held IRAs may not offer the greatest growth potential, but they do come with FDIC insurance in most instances. As a result, you're guaranteed not to lose the insured portion of your account in the event of a banking crisis. Other types of non-bank accounts do not have that protection.