Most of us need only a fraction of what the Federal Deposit Insurance Corporation is willing to protect. For most people, the FDIC covers up to $250,000 per depositor. If you have up to $250,000 in a regular bank account offered by a typical bank that participates in the FDIC program, you’re protected against the bank’s possible failure. With FDIC coverage, your money will be there when you need to withdraw it.
Banking Deal: Earn 1.75% APY on an FDIC-insured money market account at CIT Bank.
If you require FDIC coverage above and beyond the $250,000 maximum, and the other limits specified in the links above do not cover your needs, there is another option. This option might be a good choice for a company with millions of dollars of cash that is not destined for investment or for a multi-millionaire who wants to keep a good portion of money in a safe investment. Certificates of deposit are good options for any portion of your portfolio that you want to ensure will not lose money and will earn interest. If that portion is more than FDIC will normally cover, you have another option.
If you diversify your CDs across multiple banks, you can extend your FDIC coverage. As the FDIC will protect up to $250,000 per depositor per bank, by spreading your money in CDs across four separate banks you easily increase your covered amount to $1,000,000. But if you have many millions of dollars to invest in CDs — and let us all have this “problem” some day — administering your investment grows in complexity.
This is how you can gain FDIC coverage for up to $50 million instead of managing accounts at 200 separate banks.
Certificate of Deposit Account Registry Service
The Certificate of Deposit Account Registry Service (CDARS) is a program that allows you to purchase CDs at different banks, providing up to $50 million of FDIC coverage rather than the typical $250,000. You work with only one service and you receive only one statement. The whole system is simple.
To sign up, you can work directly with any bank that is a member of the CDARS network. The member bank will take your deposit and invest it among other banks in the network. The amount invested with each bank will be less than the FDIC maximum to allow for the interest you earn to be within the coverage limits as well. As the depositor, you’ll receive only one statement even if your money is distributed across more than a hundred banks. The statement will show you where your money is deposited.
Also simplifying the experience, you earn one overall rate rather than different rates at each bank, and you can choose a maturity ranging from 4 weeks to 5 years. There are no fees of any kind for using this service, but the aggregate rates offered may be slightly lower than if you managed the full diversification yourself.
CDARS is not practical for me right now, but it appears to be a useful tool for anyone or any company that has a large amount of money they would like to leave in safe, liquid investments. I do plan on using certificates of deposit at some point in the future, and I will likely build a CD ladder when I do.
Updated January 12, 2018 and originally published September 9, 2009.