What’s The Difference Between FDIC and SIPC?
We aim to address topics on the Secure Your Retirement podcast that people have asked us about. Recently, we’ve been receiving questions about whether the funds in Schwab, Fidelity, etc., are insured.
Some accounts, if they are bank-related, are FDIC-insured.
If the account is not bank-related, it will not be FDIC-insured. We need to really think of these as two separate entities:
- Banking
- Investments (stocks, bonds, mutual funds, etc.)
In most cases, your will have money in both of these types of accounts (realizing there are other options outside of these two as well). Both are fundamental in your retirement planning but are also very different.
What is FDIC and Why Was It Put in Place?
The Federal Deposit Insurance Corporation (FDIC) made headlines last year when regional banks like Silicon Valley Bank (SVB) started having issues. Businesses and individuals had a lot of money in SVB, and this sparked a relevant interest in the FDIC.
In the 1920s and 1930s, bank failures led to people losing money and savings.
In response, the government started the FDIC to protect the public. If the bank does something wrong or there are other issues, people would be covered up to a certain dollar amount by the FDIC.
The FDIC covers up to $250,000 per person. If you have $250,000 in your own savings account, you can be confident that up to this amount is covered by the government.
During the SVB debacle, FDIC was extended up to $1 million.
Why?
The FDIC is a way to make consumers feel more comfortable with the banking system. With account titling, you can cover a lot of your assets with FDIC.
You can receive coverage for (talk to your banker to do this properly) :
- Separate accounts
- Joint accounts
- Transfer On Death (TOD) accounts
- Trust Accounts
Different account registrations can help you cover your money in multiple accounts with FDIC. If you have bank accounts with ten different banks, each account can be covered by FDIC. If you have more than $250,000 at one bank, work with a banker to see options to extend FDIC coverage.
When you work with a bank for your investment, the investments and securities do not fall within the FDIC. Cash in the bank falls under FDIC, but investments do not.
Investments have risks, and since this is the nature of investments, the government does not cover these funds. Enter SIPC.
What is SIPC?
SIPC stands for Securities Investor Protection Corporation. If you’re a securities company, such as Schwab or Fidelity, you have SIPC protection.
Why?
SIPC protects you from a different side of things compared to FDIC. Custodians, such as Schwab and Fidelity, allow you to invest money in stocks, mutual funds and so on, but you’re not invested in these companies.
Instead, you invest through the custodian. You can move all your investments to another custodian whenever you like.
If you want to see your stock in one of these custodian accounts, and the custodian cannot find the stock or the investment you made, this is where SIPC comes in. SIPC protects against these types of clerical errors.
You can lose 90% of your investment in a stock because the company is going bankrupt, and there is no insurance for this risk. However, if the investment is lost because of a custodian error, SIPC will offer up to $500,000 per person in protection.
If Schwab went out of business, SIPC would put forth the money to help you find your:
- Stocks
- Mutual funds
- Etc.
In the market, you can lose your money. A custodian’s purpose to provide a place to park your investments like a parking garage’s purpose is to give you a place to park your car. If those investments are somehow lost, SIPC does offer some protection to help find your “lost car”.
Financial planning with the right strategies in place provides you with peace of mind that your money and investments have the maximum amount of protection possible.
Do you have questions about your financial plan or about FDIC and SIPC?