It would be hard to find a podcast-hosting duo more totally invested in answering your financial questions than Alison Southwick and Robert Brokamp -- they put "Answers" in the show's name, for goodness' sake! And this week, they're at it again, combing through the Motley Fool Answers mailbag in search of conundrums to address for their listeners. But because three heads are better than two, for this episode, they've enlisted the help of Sean Gates, a financial planner with Motley Fool Wealth Management.
In this segment, they're talking CDs, fielding a question from a listener curious about what happens on the off chance a bank fails and his FDIC insurance kicks in. Good news: The FDIC moves fast. Less good news: Depending on how you acquire your CD, and from where, there can be less certainty about getting the total payout you expect.
Sean Gates is an employee of Motley Fool Wealth Management, a separate, sister company of The Motley Fool, LLC. The views of Sean Gates and Motley Fool Wealth Management are not the views of The Motley Fool, LLC and should not be taken as such.
A full transcript follows the video.
This video was recorded on June 26, 2018.
Alison Southwick: Next question comes from Al. "Dear Alison and Bro, but mostly Bro. You have talked about putting cash in CDs and treasuries to earn higher interest than what you can get in a savings account. I have a brokerage account and there are many CD choices with decent returns. How much effort do I need to spend looking into the banks that I choose? I know the money is FDIC-insured, but what does that mean? If the banks go under, will my widow be waiting for reimbursement from the government for years while I, like old John Brown, lay a-moldering in my grave? Or, can I hearken back to my hippie roots, be a free spirit, and just send my money off willy nilly to any bank with a groovy rate? Thank you, but mostly Alison, for making me smile each week."
Robert Brokamp: I'll start off by pointing out the difference between bank CDs and broker CDs. If you go to the bank, you give them, let's say, $10,000, you don't pay a commission, generally, it's just built into the structure of the CD. If it's due in five years, in five years, you'll get the money back. If you redeem it early, you'll pay like three months' worth of interest as a penalty.
CDs you get from your broker can be different. First of all, some of them trade like bonds. While they may have a par value of $10,000, they might be worth a little less or a little bit more because they're trading on the secondary market. Also, not all broker CDs are FDIC-insured. It's important to know whether it actually is FDIC-insured or not.
Another thing to consider is that some CDs can be callable. That means, let's say you buy a five-year CD. The bank may have the option of basically turning it in early, like three years, saying, "Sorry, we're going to give you your money back early," and you didn't expect that. Those are all things to look at.
Once you do all that, as long as it's FDIC-insured, I think you can feel relatively safe about that. I should say that if you're buying it on the secondary market, the insurance is based on the value of the CD when it matures, not what you paid for it. Keep that in mind, that's what's known as a par value.
Just so you know, a little bit about FDIC insurance -- it is, as they define it, $250,000 per depositor, per FDIC-insured bank, per ownership category. That means you could actually be at the same bank and have $250,000 in a regular old single-owned account, then $250,000 in an IRA. Those are two different ownership categories, and you're still covered. If you go to the FDIC's website, they have something called EDIE, the electronic deposit insurance estimator. It basically tells you how much insurance you have.
I do think it's interesting that he put that "if the bank goes under, will my widow be waiting for reimbursement from the government," like somehow, the bank going under and him dying are tied together. I don't know if whatever's bringing the bank down is going to also bring him down. Those are sort of separate categories.
Sean Gates: He lives under the bank.
Brokamp: [laughs] I guess so! Something there! But, generally speaking, according to the FDIC, if it's a regular old bank, it only takes one to two days for you to get your money. They either open up an account for you at another bank that is solvent, or they just write you the check. You get the money pretty quickly. But that's a difference between that and a broker CD. Broker CDs can take up to 60 to 90 days to get the money, but generally you do get the money pretty quickly.