Is Your Money Safe? Understand the Difference Between FDIC and SIPC Insurance

Your five-minute guide to the ways your money and investments are protected against institution failure.

Luckily, bank and brokerage failures don't happen very often. But when they do, they can have a huge destabilizing impact on the wider economy. As we've seen with Silicon Valley Bank, not only do bank collapses affect customers and investors, but panic can also spread quickly to other institutions.

The good news is that there are a number of measures in place to protect your savings and investments. Key amongst them are FDIC and SIPC insurance, which cover your money in the event of bank or brokerage failure.

The differences between FDIC and SIPC insurance

The main difference between FDIC and SIPC insurance is that one covers deposits in a bank and the other covers assets with a brokerage firm. Understanding what each one does can help you ensure your money is insured and enables you to take extra steps if necessary.

Here is a summary of FDIC insurance versus SIPC insurance:

Know your limits

There's a limit to what -- and how much -- FDIC and SIPC insurance will cover. This has become a hot topic recently, because a large proportion of Silicon Valley Bank's deposits were not insured. While SVB did have an unusually high proportion of uninsured deposits, it is not alone. According to S&P Global, at the end of 2022, over 45% of total U.S. bank deposits fell outside of FDIC coverage limits. Some lawmakers are pushing for changes to the system so that all deposits are insured. That may or may not happen. In the meantime, there are steps you can take to protect your money.

FDIC insurance limits

FDIC insurance covers up to $250,000 per depositor, per bank, per ownership category. Ownership categories are different from bank account products such as a saving or checking account. They are better understood as the way you hold your funds. For example, a single account falls into a different ownership category from a joint account. If you have a retirement account that's covered by the FDIC, that is another category.

To give you an idea of how that might work in real life, let's say Mary and Margaret have various accounts with the same bank. They put $400,000 into a joint account. Mary has $100,000 in a savings account and $200,000 in certificates of deposits (CDs). Margaret has $200,000 in a CD and $100,000 in an FDIC-insured individual retirement account (IRA).

Here's how that breaks down into ownership types and coverage:

Margaret has more money with the bank, but because it is split across different ownership categories, all her funds are insured. Mary's savings account and certificates of deposits all come under the umbrella of a single account, and exceed the $250,000 limit. Some of her money would not be protected by the FDIC if the bank failed.

SIPC insurance limits

If your brokerage firm fails, SIPC insurance covers up to $500,000 of assets. This includes any securities you hold and as much as $250,000 in cash. As with FDIC insurance, if accounts are held in different capacities, they qualify for separate insurance. For example, if you hold equities as an individual and also have a joint account as a couple, each one would be covered for up to $500,000.

Broadly speaking, the protection applies to various equities and investments that qualify as securities. These include:

• Stocks
• Bonds
• Treasury securities
• Mutual funds
• Money market mutual funds
• Real estate investment trusts (REITs) that are registered with the SEC

The SIPC only gets involved when regulators refer the case to them. If this happens, it can either transfer customer accounts to another firm or liquidate assets. Be aware that you're covered for the number of shares you hold, not the cash value of those shares. So if the share price dips during the liquidation process, your losses would not be covered.

SIPC insurance doesn't protect you against losses from investments that don't perform as you'd hoped. If you own shares in a company that goes bankrupt, the SIPC would not pay out. There are also a number of other assets you might buy at a brokerage that are not covered. These include:

• Futures contracts
• Foreign exchange
• Cryptocurrency
• Unregistered investment contracts
• Gold and silver

How to make sure your money is safe

It's terrifying to think that the savings and investments you've worked hard to build could get wiped out by a financial crisis. However, not only are there a number of protections in place to stop this from happening, there are also steps you can take.

1. Check whether your funds are protected

If for some reason your bank or investment account is not FDIC or SIPC-insured, you might want to consider moving your money elsewhere. Here's how to check your account is covered:

• FDIC insurance: Most banks are FDIC insured, but you can double check by looking on your bank's website. You can also use the FDIC's bank finder tool or call them at 1-877-275-3342.
• SIPC insurance: Check out the terms and conditions on your brokerage account. You can also check out the list of members on the SIPC website, or call them at 202-371-8300.

2. What to do if you have more than $250,000 in bank deposits

If you have more than $250,000 with one bank, use the FDIC calculator to find out what's covered. As we discussed above, if your money is in different ownership categories, you could be insured for double or even triple the $250,000 threshold. If it's not, consider the following options to insure more of your bank deposits:

• Open an account with another bank or credit union
• Open a joint account or another account with a different ownership category
• Consider moving money into a brokerage account

3. What to do if have more than $500,000 in securities

If you have more than $500,000 in investments, don't panic. A number of top brokerages also have excess SIPC insurance and protect higher amounts. Check with your broker to see whether this is the case, and how much is covered.

It's also reassuring to know that brokerages are required to keep customer assets segregated. In theory, this means that your investments won't be mixed in with those of the brokerage and you'll be able to get them back if the firm fails -- potentially without SIPC intervention. According to FINRA's website, "In virtually all cases, when a brokerage firm ceases to operate, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm."

All the same, part of the reason we take out insurance is because the unexpected sometimes happens. If you hold more than the $500,000 threshold with a firm that does not have excess insurance, you might consider opening another brokerage account with a different firm to get additional protection. As with the FDIC coverage, you'd also qualify for more SIPC insurance if you set up another account with the same institution under a different category, such as a joint account.