Should I Keep More Than $250,000 in One Bank?

The question of whether to keep more than $250,000 in a single bank account is a common concern for many individuals and businesses. This concern primarily arises due to the Federal Deposit Insurance Corporation (FDIC) insurance limit, which serves as a safeguard for depositors’ funds in the unlikely event of a bank failure. Understanding the mechanics of FDIC insurance and alternative strategies for managing larger balances is crucial for ensuring financial security.

Understanding FDIC Insurance Coverage

The Federal Deposit Insurance Corporation (FDIC) is an independent U.S. government agency established in 1933 to maintain stability and public confidence in the financial system. Its primary role is to protect depositors’ money in FDIC-insured banks. Since its inception, no depositor has lost insured funds when an FDIC-insured bank failed.

The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. This coverage applies automatically to various deposit accounts, including checking accounts, savings accounts, money market deposit accounts (MMDAs), and Certificates of Deposit (CDs). It also covers official items issued by a bank, such as cashier’s checks and money orders.

It is important to understand what FDIC insurance does not cover. It does not insure investment products, even if purchased through an FDIC-insured bank. This exclusion includes stocks, bonds, mutual funds, annuities, life insurance policies, and cryptocurrency. Furthermore, the contents of safe deposit boxes are not covered by FDIC insurance.

Ownership categories are key to maximizing coverage within a single institution. Different categories, such as single accounts, joint accounts, and certain retirement accounts (like IRAs), each qualify for separate $250,000 coverage. For example, an individual could have $250,000 in a single account, another $250,000 in a joint account with a spouse, and $250,000 in an IRA at the same bank. Business accounts are also insured up to $250,000 per ownership type, separate from personal accounts.

Protecting Funds Exceeding the Limit

Depositors holding funds exceeding the $250,000 FDIC insurance limit at a single institution under one ownership category face a potential risk. However, several strategies can protect these larger balances within the banking system. These methods leverage the structure of FDIC insurance to expand coverage.

One straightforward approach is to spread funds across multiple FDIC-insured banks. Since the $250,000 limit applies per depositor, per insured bank, opening accounts at different banks can significantly increase total insured amounts. For instance, $750,000 could be placed in three different FDIC-insured banks. Deposits in different branches of the same bank are not separately insured; they are aggregated under the single bank’s limit.

Another strategy involves utilizing different ownership categories at the same bank. Each ownership category, such as a single account, a joint account, or a trust account, is separately insured up to $250,000. For example, a married couple could have $250,000 in individual accounts for each spouse and $500,000 in a joint account, all at the same bank. Trust accounts can also provide expanded coverage, with each qualifying beneficiary potentially adding up to $250,000 in coverage.

Brokered Certificates of Deposit (CDs) offer another way to extend FDIC coverage. These CDs are purchased through a brokerage firm but are issued by FDIC-insured banks. A broker can place a client’s large sum into CDs with multiple FDIC-insured banks, spreading the money for expanded coverage while managing investments through a single brokerage account. This method allows diversification across many banks without opening individual accounts at each.

Alternative Safe Havens for Large Balances

For individuals and entities with substantial assets exceeding FDIC limits, exploring alternative secure options beyond traditional bank deposits is relevant. These options generally fall outside of direct FDIC coverage but are considered highly liquid and low-risk investments.

U.S. Treasury securities, including Treasury Bills, Notes, and Bonds, are considered among the safest investments. They are backed by the full faith and credit of the U.S. government. While not FDIC-insured, their default risk is negligible, making them a secure choice for capital preservation. These securities can be purchased directly from the U.S. Treasury or through a bank or broker.

Certain money market mutual funds also serve as a low-risk option for holding cash. These differ from money market deposit accounts (MMDAs), which are bank products covered by FDIC insurance. Money market mutual funds are investment products offered by brokerage firms and fund companies, investing in short-term, highly liquid debt instruments like government securities and corporate debt. While not FDIC-insured, they are low-risk and aim to maintain a stable net asset value of $1 per share.

Funds held within brokerage accounts may receive protection through the Securities Investor Protection Corporation (SIPC). SIPC protects against the loss of cash and securities held by a customer at a failing SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash. This coverage differs from FDIC insurance as it protects against the brokerage firm’s failure, not against a decline in the value of securities due to market fluctuations.