On April 1st the Federal Deposit Insurance Corporation (“FDIC”) will
increase its deposit insurance coverage of retirement accounts from
$100,000 to $250,000. [1] This change represents the first boost to
coverage in over twenty-five years. [2] Despite coverage for
non-retirement accounts staying at the current level of $100,000, the
increase in coverage for retirement accounts will be beneficial to
consumers and banks alike. [3]
The
last increase in deposit insurance coverage took place in 1980 when it
was raised from $40,000 to $100,000. [4] However, many Americans now
have much more than $100,000 in retirement savings. [5] This meant
they were forced to bank at multiple institutions in order to have all
of their retirement funds insured. [6] Under the new law, individuals
will be able to have up to $250,000 in retirement funds at one bank.
[7] This will make banking easier for consumers and increase profits
for banks.
Despite the caps, it is still possible to have all of one’s funds at
a single institution and have them insured as retirement and
non-retirement accounts are treated differently for insurance purposes.
[8] Retirement accounts, no matter which type, are added together and
the total is insured up to $250,000. [9] Non-retirement accounts are
not totaled, rather each category of account is insured separately up
to $100,000. [10] For instance an individual may have a checking
account, a joint account with their spouse, a retirement account, and
trust account benefiting their spouse and child. The checking account
will be insured up to $100,000. The joint account will be divided in
half and each half treated separately. [11] This means that a couple
may have up to $200,000 in a joint account and it will still be insured
as each spouse’s $100,000 share is insured separately. [12] As noted
above retirement accounts will now be insured up to $250,000. [13]
Trust accounts receive up to $100,000 of insurance protection per
beneficiary, not depositor. [14] Thus an individual could have a
$200,000 trust naming his wife and child as beneficiaries and the full
$200,000 would be insured. [15] Under this system one could have
$650,000 (or more if the trust has more than two beneficiaries)
deposited at one institution and still have their funds insured by the
FDIC.
While the increase in coverage for retirement accounts has been
welcomed, some feel that the FDIC should have also raised its coverage
for regular accounts as the insurance cap of $100,000 does not account
for the inflation of the past twenty-six years. [16] To keep place
with inflation it is claimed that coverage on regular accounts should
be raised to $235,000 or at least doubled. [17] Additionally, the
$100,000 insurance cap favors large banks over small ones as consumers
are more willing to trust major banks with accounts that exceed the
insurance cap and leave some funds uninsured. [18]
While it is not a panacea, the increase in FDIC deposit insurance
coverage for retirement accounts is a change that should be welcomed by
all Americans. Consumers will now be able to have fewer accounts
resulting in fewer hassles and fewer bank fees, while banks will be
able to handle the entire retirement savings of individuals rather than
only receiving a share.
[1] Laura Bruce, Deposit Insurance Reform: What it Means to Consumers, Yahoo, March 16, 2006, http://biz.yahoo.com/brn/060316/18251.html?.v=1
[2] PR-29-2006, FDIC Insurance for Retirement Accounts Increased
to $250,000 Higher Coverage Takes Effect April 1; Basic Insurance Limit
for Other Accounts Stays at $100,000, March 14, 2006, http://www.fdic.gov/news//news/press/2006/pr06029.html
[3] Bruce, Supra, Note 1.
[4] Id.
[5] FDIC Consumer News, Special Bulletin April 2006, What You Should Know About Higher FDIC Coverage for Retirement Accounts, http://www.fdic.gov/consumers/consumer/news/special/specialApril06.pdf
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Id.
[16] Bruce, Supra, Note 1.
[17] Id.
[18] Id.