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.
The above statements are a bit simplified. Here are more details on FDIC coverage limits and what is protected by the FDIC.
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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.
Find a bank that participates in CDARS by using this search tool.
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 September 24, 2015 and originally published September 9, 2009.
{ 9 comments… read them below or add one }
This is great Flexo! My boyfriend is about to inherit a bunch of cash and we were just discussing the situation with FDIC limits and how he’d need to open a bunch of accounts at different banks. Very timely…thanks so much.
Glad I was able to help, Stacey!
You forget one thing – this all hits the fan if the FDIC runs out of cash (which is looking at least probable). FDIC is a good thing to have, but only if we can afford it, which isn’t looking likely with the current state of our economy.
FDIC has a massive credit line, they’re increasing required fees paid by banks, and the government will print money if they have to. FDIC is in verry little danger of not being able to cover bank failures even in the worst of conditions.
I do not understand how you make money on these CD’s if (from the article) ” 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”. I think it is great if you do have a large sum of cash you want protected, but how do you earn from these investments?
You earn interest the same way you earn on any certificate of deposit. You choose your maturity and earn the interest rate assigned. The bank(s) pay you the interest. Maybe you’re misunderstanding the statement — if the FDIC maximum for coverage is $250,000, CDARS invests only say $230,000 with each bank so when the bank pays interest into the account, it doesn’t put you over the maximum ($250,000).
Maybe I am missing something here, but I still don’t get it. If I invest $20 million in a CDARS account in 30 day CD’S, it seems at the end of the 30 days, when these mature, I am still only going to have $20 million. Please explain .
I believe 20,000,000 invested in cdars at 5% is actually fully matured annually. Although month to month is an option it is only a fraction of 5%. so in 30 days it would be 20 mil • 5%/12. your balance at months end would be closer to 20,083,333.33 so about $83,333 interest on 20 mil.
For the example you used 5% interest is that an accurate assessment for $20million ? So if you had $50 million what would you be looking at??