Is Cash in a Brokerage Account FDIC Insured?
Clarify the protection for cash in your brokerage account. Understand how these funds are secured differently than bank deposits.
Understanding how uninvested money in a brokerage account is protected is important for managing financial assets. While traditional bank accounts have one form of protection, brokerage accounts operate under a different framework, involving distinct mechanisms to safeguard cash and investments.
Understanding Protection for Cash in Brokerage Accounts
Cash held in a brokerage account is generally not insured by the Federal Deposit Insurance Corporation (FDIC) like funds in a traditional bank account. The FDIC primarily insures deposit accounts at banks, such as checking or savings accounts, against the institution’s failure. This protection is distinct from coverage for assets held with a securities firm.
Instead, the primary protection for brokerage accounts comes from the Securities Investor Protection Corporation (SIPC). While the FDIC protects against bank failures, SIPC protects against the failure of a brokerage firm itself. This difference exists because brokerage accounts hold securities like stocks and bonds, not just cash deposits.
Uninvested cash directly within a brokerage account is typically covered by SIPC, not FDIC. This distinction is important for investors to recognize. The type of institution holding the funds dictates the applicable protection.
How SIPC Protects Brokerage Accounts
The Securities Investor Protection Corporation (SIPC) is a non-profit, member-funded corporation established by Congress. Its role is to protect customers of SIPC-member brokerage firms if the firm fails financially. SIPC steps in to restore customer cash and securities missing due to the brokerage firm’s insolvency.
SIPC protection covers securities, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs), as well as cash. The limit of SIPC protection is up to $500,000 per customer for all securities, which includes a separate limit of $250,000 for uninvested cash. This coverage applies per customer, per “separate capacity,” meaning different types of accounts like an individual account, a joint account, or an Individual Retirement Account (IRA) generally receive separate protection limits at the same firm.
SIPC does not protect against market losses, such as when the value of securities declines. It also does not cover losses from unsuitable investment advice or fraudulent activities. SIPC’s purpose is to ensure customers’ assets are returned if the brokerage firm cannot fulfill its obligations due to its own financial difficulties.
Where FDIC Protection Applies
While FDIC insurance generally does not apply directly to brokerage accounts, it can protect cash in specific circumstances. Many brokerage firms offer “cash sweep programs” for uninvested cash balances. Through these programs, money not actively invested in securities is automatically transferred, or “swept,” into deposit accounts at one or more FDIC-insured partner banks.
Once funds are swept into these partner banks, they become eligible for FDIC insurance. The standard FDIC limit of $250,000 per depositor, per insured bank, per ownership category, applies to these swept funds. If a brokerage firm uses multiple FDIC-insured banks for its sweep program, an investor’s cash may be eligible for coverage exceeding $250,000, as funds are spread across different banking institutions.
Until cash is swept into an FDIC-insured bank, it remains in the brokerage account and is protected by SIPC. Investors should review their brokerage firm’s disclosures to understand how their uninvested cash is managed and which protection applies. This arrangement allows for the potential benefit of FDIC insurance on cash balances while maintaining accessibility for investment purposes.