A:

The Federal Deposit Insurance Corporation, or FDIC, is a government-run 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 financial disaster and crash of the stock market that took place in 1929. While the coverage per account, per institution has changed over time, the FDIC has remained true to its initial objective in keeping banking customers safe from losing money in deposit accounts, up to $250,000 per account in most cases. As of 2015, the FDIC covers customer deposits held at FDIC-insured banks or savings and loan associations, including assets held in savings, checking, money market, certificates of deposit and IRA accounts. However, not all traditional or Roth IRA accounts are treated in the same manner under FDIC protection.

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 retirement years. While a traditional IRA and a Roth IRA are suitable for different individuals based on time horizon and other retirement savings, both types follow the same guidelines when it comes to what can be held within an IRA account. Deposit accounts, or those offered through a bank or savings and loan association, are all available to be held within a traditional or Roth IRA. These deposit accounts include checking and savings accounts, money market deposit accounts and certificates of deposit, all of which are covered under the FDIC.

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. Saving for retirement can be a daunting task, and the IRA annual contribution limits can make it an even greater challenge if no other retirement savings vehicles are available to an individual. To combat this, individuals are allowed to invest within a traditional or Roth IRA in an attempt to earn a higher rate of return than what may be offered on conservative bank products. Investments held in a traditional or Roth IRA can include mutual funds, exchange-traded funds, or ETFs, individual stocks, bonds, annuities or money market funds.

Because each of these investments are based on market performance, the individual who holds these nonbank securities in an IRA account bears all the risk if the securities lose value over time. The FDIC does not insure investments held within a traditional or Roth IRA, even if the account was established and trades were placed through an FDIC-insured institution.

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, and each non-IRA account carries this level of coverage. For instance, if a banking customer has a certificate of deposit with a bank with a value of $225,000, and a money market deposit account with a value of $115,000 at the same institution, his accounts are added together and covered by the FDIC up to $250,000. The same limits are applied for checking and savings accounts held at FDIC-insured financial institutions.

IRAs fall under a different insurance category than conventional deposit accounts. Therefore, coverage for IRA accounts is less. The FDIC still offers insurance protection up to $250,000 for traditional or Roth IRA accounts, and account balances are combined rather than viewed individually. For example, if the same banking customer has a certificate of deposit held within a traditional IRA with a value of $200,000 and a Roth IRA held in a savings account with a value of $100,000 at the same institution, the account holder has $50,000 of vulnerable assets without FDIC coverage.

The FDIC is an important factor in protecting banking customers, but it does not cover all assets equally. For IRA owners, it is important to understand which types of accounts are covered and to what extent.

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