October 6, 2008 Update: The FDIC has increased the maximum deposits covered under federal insurance. The new FDIC coverage limits are outlined here.

Without getting too specific about the company I work for, a large company like mine has to make efficient use of its financial assets. Most of a company’s money should be invested in bonds, equities, or even more complex financial instruments, but a portion needs to be in regular deposit accounts like savings and certificates of deposit to maintain liquidity. The best strategy when dealing with millions of dollars in CDs is to distribute the money across a large number of banks across the country. As I mentioned earlier, as long as a bank is insured by the Federal Deposit Insurance Corporation (FDIC), the money is safe, up to $100,000 per depositor per account.

The FDIC does more than protect up to $100,000, and the details are important.

At any particular bank, single accounts — that is, not joint accounts — are insured up to $100,000 in total. For example, if you have three accounts, one checking account with $3,000, one savings account with $50,000, and one CD with $25,000, you’re under your limit. If your total money held in single accounts at that bank exceeds $100,000, only $100,000 is protected (though the FDIC will do its best to provide access to all of your funds if the need arises).

There is a “danger” with CDs, as well as savings account, when it comes to interest earned. If you have maximized your coverage with a CD whose balance is $100,000, the interest you earn would put you over the limit once the bank credits your account. The risk of never seeing that money is very low, but it’s important to be aware that you would be over the limit if you receive $5,000 in interest on that $100,000 CD. Large companies with accounts at the limit might have instructions to wire interest to another bank to avoid surpassing the FDIC limit, but individual accounts are normally not granted this feature.

If you have joint accounts at the bank, they are also insured up to $200,000 in total. If you are listed as the account’s owner in conjunction with just one other person, such as your husband or wife, then you’re protected for half of the account’s total, up to $100,000, and your joint owner is protected for the other half.

Couples can also set up a trust for children or another relative, insured by the FDIC up to $200,000 per qualifying beneficiary (see FDIC’s explanation). The FDIC also insures retirement accounts held at banks. That includes IRAs, Keogh plans, and self-directed 401(k)s up to a total of $250,000.

Keep in mind that the FDIC does not insure mutual funds, annuities, bonds, or Treasury bills, even if you purchased the investments at an FDIC-insured bank. That doesn’t mean that your money isn’t safe. The Securities Investor Protection Corporation (SIPC) is an organization that protects stocks and bonds from failures in which these assets can become “lost” and from brokers who steal customers’ funds. If your investments simply lose money as many do in the market, the loss is not covered by SIPC.

One thing to watch out for is the difference between “money market accounts” (MMAs) and “money market funds” (MMFs). MMAs are deposit accounts like everyday savings accounts and function similarly. MMAs are eligible for FDIC protection if held at a bank, and they are included in the $100,000 limit with other individual savings accounts. If the MMA is held jointly, it is included in the separate limit for joint accounts. MMFs on the other hand are considered investment products and are not eligible for FDIC protection, even if held at a bank.

Even if you have deposits over the limit of FDIC’s protection, like 10,000 IndyMac customers had when that bank collapsed, the FDIC still does its best to make the excess funds available in a timely manner. In this case, the FDIC provided advances to customers for 50% of their funds deposited over the FDIC limits.

There is always a slight possibility that the entire banking system in the United States could collapse. It’s a very remote possibility, and expecting the worst would be approaching paranoia. But in this highly unlikely situation, even the FDIC might not be able to help you withdraw your funds. It’s always good to keep cash on hand as part of an emergency plan, but taking all of your money out of the banking system would be excessively paranoid.

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