Ep. 264 – What’s The Difference Between FDIC and SIPC in Retirement?


In this episode of the Secure Your Retirement Podcast, Radon and Murs discuss the difference between FDIC (Federal Deposit Insurance Corporation) insurance and SIPC (Securities Investor Protection Corporation) insurance. Both FDIC and SIPC offer protection of funds held in accounts at financial institutions like Charles Schwab or Fidelity.

Listen in to learn about the basics of FDIC insurance, which protects bank deposits, and SIPC insurance, which safeguards investors against the loss of cash and securities. You will also learn about strategies to help you maximize coverage using account titling and diversification.

In this episode, find out:

  • FDIC – a federally backed insurance on banks created to restore public confidence in the banking system.
  • Understanding the types of accounts and the amount of money FDIC insurance covers.
  • SIPC – insurance that protects investors against the loss of cash and securities held by a brokerage firm.
  • SIPC insurance doesn’t cover market losses but ensures the return of missing stocks and other securities.
  • The differences between bank deposits (covered by FDIC) and investment securities (covered by SIPC).
  • The importance of having a diversified investment strategy to balance safety and growth potential.

Tweetable Quotes:

  • “FDIC was created to make people feel comfortable with the banking system, knowing that there could be issues, but there are covers that their money is protected”– Murs Tariq.

“Let’s think through how to make a financial plan and build an investment strategy around it in various buckets and diversification types of strategies so that we’ve got good strategies working for us.”– Murs Tariq.


If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:  Welcome to Secure Your Retirement Podcast. Today we’re going to, as we do a lot of times, try to hit on a topic that we get questioned about, meaning we get a number of clients that are asking us, “Hey, is this the way that works?” Or, “Is this the way that works?” And then we try to say, “Hey, you know what? We’ve heard that question a few times, so let’s address it and talk about it. And our latest question was this, “Hey, are my funds in that account over at Charles Schwab, which is who we use, or Fidelity, are those FDIC insured?” Now I’m going to blanket answer here and say, there are some accounts that you could have at Schwab or Fidelity, if they were bank related, that would be FDIC. And I just gave you a hint there; if they’re not bank related, then they would not be FDIC. So then the next question comes up and says, “Well then what’s the difference and how am I protected?” And that’s what we want to talk through today and really help us to understand the difference between the two. 


  And so just to kind of get us started, I wanted you to separate your mind into two worlds, and that one world would be the banking system and then the other part of the world would be investments, let’s call it security. So stocks, bonds, mutual funds, those kinds of vehicles that I’m investing in, and then I’ve got a bank account. And that bank account, Charles Schwab, they have a banking system, and so they have some of their funds that you could have there if it were just in cash, be covered under FDIC. But we think it would be good just to kind of give us a little bit of understanding about what FDIC is and why FDIC is so important, because there’s a big difference between the two, And then why it’s not as important if we’re looking at investment. So I guess Murs, can you just start us off here? Give us a little bit of the background of FDIC and why that was put in place in the first place? 


Murs Tariq:  Yeah, so FDIC, it made a bunch of headlines last year all around some of the regional bank issues that came around starting with Silicon Valley Bank and a lot of businesses, a lot of individuals had a lot of money there. And you probably remember hearing about this run on a bank, and that’s where FDIC became really popular again. How much does FDIC, what does it cover me? For a period of time there, FDIC, which by the way, stands for Federal Deposit Insurance Corporation. So it’s a federally backed insurance on banks. And the reason it was created in the first place is because back in the 1920s and early 1930s, there were bank failures and people were losing their money. Well, the government came out and basically said, “We don’t want to have this situation where banks are failing and people are losing money, and they start to lose confidence in the banking system.” So they came out with FDIC to reinvigorate and say, “Hey, even if there are bank issues, because banks are for-profit companies, just like retail companies are, so they could fail, they could make mistakes, they could make bad investments themselves, so we want to make sure that the public knows that if a bank does something wrong or if there are issues with the bank, we’re going to federally back them to make sure that there is coverage in that event.” 


  So it just brought confidence back into the banking system that, “Hey, if a bank falls apart, that’s okay. I’m FDIC covered up to a certain dollar amount.” What was interesting back during the Silicon Valley Bank debacle that happened last year was FDIC got extended and who has the ability to extend it? The federal government, because they also have the ability to print money and so they were able to extend that number. 


  The number of coverage is 250,000 per person, and we’ll leave it there for a moment; per person. So I could put 250,000 into my own checking or savings account, and I am never worried about if that bank was to go under because I would be covered by FDIC to get that money back even if that bank had issues. Back during the Silicon Valley Bank, they actually extended that out to a million and then some, just to make sure everyone is still comfortable with the banking system. 


  So the thing I want you to get out of this is FDIC was created for a reason, which was to make people feel comfortable with the banking system, knowing that there could be issues, but there’s coverage that your money is protected. The limit, 250,000, sometimes you hear 500,000, so you can play with that a little bit. In our CFP training, they would take us through some ways of, how can you set up accounts so that you can get basically unlimited coverage with FDIC? And there’s different, it really comes down to account titling. So I could have a checking account that’s 250,000 and I’m covered. My wife could have a checking account on her own, that’s 250,000 and she is covered. And then there’s different titlings that you could bring into play that buys you additional coverage; joint accounts, these things called TOD or POD, which is transfer-on-death or payable-on-death trust accounts, all different types of account registrations have different rules as far as how much coverage they’re going to allow for. So you can take that number well above 250,000 for yourself. And that’s just per bank. So you could go to 10 different banks, and all of a sudden you’ve got plenty of federal coverage on the side of FDIC. 


  So now when you work with the bank, they offer things like checking accounts, savings accounts, money markets, CDs, but sometimes they also offer securities and investments and things like that. What we want to be clear about here is that those investments, those bank products, those securities are not falling under the FDIC insurance of that $250,000 of coverage. It really comes down to the cash in the bank that you’ve deposited, either through checking, savings, money, market, CDs. So I think that’s a big, big thing that you need to understand as well, is that investments have a level of risk, and the federal government basically says, “Well, you’re taking a risk, you’re signing up for a risk, so we are not going to cover if that investment acts poorly or doesn’t benefit you, because that’s the nature of investments.” So that’s the high level on FDIC, where it came from and how it applies. 


Radon Stancil:  All right, so then we’ve got the other side of the world, which is SIPC, which stands for Securities Investor Protection Corporation, which in all essence, if you are a securities company, a large securities company that houses securities like a Schwab or a Fidelity, then they want to be a member of that. And what that does is protect you, but from a different side of things. I always tell people, because sometimes people say, “Hey, why do you use Schwab?” Or, “Why do you use Fidelity?” And I go, “Look, here’s the way it is. These custodians are, in all essence, the way I like to illustrate it is like a parking lot. And so if I go to a parking lot, sometimes I have to pay in order to park there, and then that’s where my car is at. It’s my car. It’s not the parking lot. The parking lot doesn’t own the car. I own the car, but now I pay a fee to be able to park there.” 


  Well, in this case, with, say, a Charles Schwab, I can park my stocks, I can park my mutual funds, I can park my bonds, whatever that is, over in the Charles Schwab securities parking lot. I own the stock, I own the bond, and so if Charles Schwab were to go out of business, I’m not invested, necessarily, with Charles Schwab. My parking lot went out of business. So if you think about it, just to give the context of risk, I could just say, “Hey, I’m moving my cars to another parking lot.” So if Schwab gets in trouble, I could say, “I’m taking all my stocks, all my bonds, all my mutual funds, they’re mine, they’re not Schwab’s, and I’m just going to move it over to the Fidelity parking lot or to the Vanguard parking lot.” So I’m not at risk if, in most cases, for a Schwab or whoever, where my money’s at, to go out of business. Where I’m at risk is if my mutual fund goes down, or if my stock goes down, or my bond loses value, there’s where my risk is. 


  Now, my parking lot, let’s go back to my parking lot; I show up at the parking lot and I want to pick up my car, and the dude at the window says, “We can’t find your car. Car’s not here,” right? Well now all of a sudden I’m going, “Well wait a minute. I left my car with you and now you don’t have my car. What happened to my car?” And he goes, “I don’t know what happened to your car.” Well, imagine if I called up Charles Schwab and I said, “Hey, I need to see my stock,” and they go, “We don’t know where your stock is. We can’t find your stock.” And then they continue not to find it. Well, there’s where SIPC comes in because they basically say, “Hey, if they were to lose your stock, meaning somehow, clerically, it doesn’t matter, lose your stock, then we’re going to come in and we’re going to protect you against that loss of the actual investment, meaning not the loss of the value based on the investment; we’re going to put forth money to go find your stock.” And their protection basically can go up to $500,000 per person. And we’ll leave that there for now. We just want you to understand the difference in the two types of protections. 


  Now, what if Schwab went out of business? Well, now maybe I don’t even have any attendants there for me to talk to, right? SIPC then comes in and says, “Nope, we’re going to put forth a certain amount of money to go help you find your stock, go help you find your mutual fund, go help you find your bond.” So a very different type of risk than I would have at the bank. At the bank, I could lose my money because the money, I’m not parking there. I actually invested in the bank. On this side, I did not invest in Charles Schwab, I used them as a parking lot. Good thing, let me just say this real quick on my analogy here for my illustration is we don’t pay for parking, the actual stock pays and the exchange is pay for the parking fee, but it’s still my stock, still my bonds, still my mutual fund. I get to be able to park there and they’re paying the bill for me because I own it. And that’s kind of a little bit of the process there. 


  And again, that’s high level, let’s don’t get over technical with that. But the idea is that there’s just two different coverages, two different risks. My risk over in the stock is the stock risk. My risk at the bank is the bank risk. That’s why I need FDIC. Anything on that, Murs? 


Murs Tariq:  No. I think it all comes back to a previous episode that we talked about of diversification of strategies, of ways to invest of risk. This is all kind of falls into the same boat, right? You wouldn’t want to put all your money into the bank just because you want to make sure it has FDIC coverage because you may give up on the ability for that money to actually grow. Today we’re seeing good rates at banks, but we know that’s not going to last forever. And just on the same flip side, you wouldn’t really want to put all your money into the stock market unless you can handle all of that risk. And so, it kind of comes back to this whole story of, let’s think through a good financial plan, how to make that financial plan, and then let’s build an investment strategy around it, in various buckets and various diversification types of strategies, so that we’ve got good strategies working for us, we’ve got money in different places, and then we’ve got coverage here and there to make a plan work very well together. 


Radon Stancil:  All right, we hope that this is at least cleared up a little bit, but you might’ve been hearing this and think, “I would like to read about it a little bit more.” You can go to our website, which is pomwealth.net, go to the blog page, we have a whole article written on this very topic. Also, if you’d like to talk to us about anything, feel free to go to the website. Top right-hand corner, click on, “Schedule call.” That will bring up our calendar. You can get on there. It’s a 15 minute call. We don’t charge anything for that. We’ll answer any questions you have and try to walk you through and guide you in whatever way we can. We hope this has been beneficial and we will talk to you again next week.