SIPC vs FDIC: What’s the Difference?

The Securities Investment Protection Corporation (SIPC) insures your investments in the event your brokerage firm goes under. Similarly, the Federal Deposit Insurance Corporation (FDIC) insures your deposits in the rare event your bank folds.

The SIPC and FDIC serve different purposes, so you won’t necessarily be making a choice between the two. Rather, you should have an informed understanding of each agency, their similarities and differences, and how they can help you protect your money.

What’s the difference between FDIC and SIPC insurance?

While both the FDIC and SIPC insure banks and other financial institutions, they’re not interchangeable, and each serves a different purpose. In broad strokes, the FDIC is an independent federal agency that protects losses in deposit accounts, while the SIPC is a nonprofit membership corporation that protects clients of broker-dealers that are members of the SIPC.

Here are a few key differences between the two entities:

SIPC vs. FDIC: What each one protects

The SIPC and FDIC offer financial protections for consumers. Both serve as essential entities to ensure financial safety for investors, whether large or small. The SIPC and FDIC, however, protect different types of accounts, which is why it’s important for consumer investors to understand what these entities do and do not insure.

The FDIC is primarily concerned with insuring various types of deposit accounts. It covers the following:

• Checking accounts
• Savings accounts, including passbooks and statements
• Certificates of deposit (CDs)
• Money market deposit accounts

The SIPC covers clients of broker-dealers for investments, such as stocks, bonds and CDs. More specifically, the SIPC covers the following:

• Notes
• Stocks
• Bonds
• Treasury stocks
• Evidence of indebtedness
• Debentures
• Voting trust certificates
• Collateral trust certificates, preorganization subscriptions or certificates
• Puts, straddles, calls or privileges made on a national securities exchange in regard to foreign currency
• Puts, straddles, calls, options or privileges on a security or collection of index securities, including interest made or based on its value
• Investment contracts, certificates of interest or participation in profit-sharing agreements, including in oil, gas or mineral royalties or leases
• Security futures as defined in section 78c(a)(55)(A) of the Securities Investor Protection Act

It’s important to understand that SIPC insurance covers your funds if the firm managing your investments goes out of business. What it does not cover are losses from either bad investing strategy or market downturns. SIPC insurance won’t protect your investments if the person managing your money makes terrible investment decisions or if the account underperforms.

Additionally, the SIPC does not insure commodity futures, investment contracts or fixed annuity contracts that are not SEC-registered.

SIPC vs. FDIC: Coverage amount

Both the FDIC and SIPC also adhere to coverage limits, with coverage amounts differing under the two agencies. Generally, the SIPC covers up to $500,000 per customer, while the FDIC protects up to $250,000.

If a financial institution fails, the FDIC will replace consumers’ funds to the dollar up to $250,000, plus interest, up to the date the bank or other institution failed. That $250,000 coverage applies per individual per account account type. This means that if a customer has both a checking account and a savings account at one financial institution, they will be insured up to $250,000 per account, for a total of $500,000 in FDIC coverage. For those with a joint account, each individual will be covered for up to $250,000 each, for a total of $500,000 in coverage.

The FDIC provides a tool called the Electronic Deposit Insurance Estimator (EDIE) that consumers can use to determine what will and will not be insured, and which limits and rules apply to an account.

The SIPC, meanwhile, covers up to $500,000 per customer, with a $250,000 limit for cash. The SIPC offers limited protections for consumers, only offering protection when a broker-dealer fails. In other words, SIPC coverage will not protect consumers from the decline in value in any securities, bad advice from a broker or inappropriate investment recommendations. Rather, the SIPC will insure investors’ money up to $500,000 per customer, replacing lost securities and stocks if a broker-dealer agency fails.

SIPC vs. FDIC: Which is better?

In short, you will want both SIPC and FDIC coverage if you hold a diverse portfolio that includes both deposit accounts and securities investments with a broker. The SIPC and FDIC operate differently while still serving the same overall purpose of protecting consumer investments.

Keep coverage limits in mind when making large investments, as that is a risk of this insurance. Remember that the SIPC, for example, will cover up to $500,000 in investments, but will only protect $250,000 in cash. The FDIC, meanwhile, will protect up to $250,000 per deposit account per customer, which means you can potentially protect $1 million or more across several types of accounts at one bank.

If you’re investing in securities, you’ll need SIPC insurance. When deciding on how to best invest your money, you may want to consider whether insurance coverage is offered. You can also keep your investments spread across multiple financial institutions, further maximizing FDIC and SIPC coverage.

Neither the SIPC or FDIC directly charge for insurance. As such, consumers won’t pay anything or have to enroll in these programs. The coverage will be applied automatically to their accounts when working with an insured financial institution. However, these costs can be passed on to customers through charges and fees from a financial institution, which customers will not be able to control.

How to know if your account is SIPC- or FDIC-insured

Not all banks or brokerages are insured. Before you invest or store your money with any institution, make sure it’s FDIC- and/or SIPC-protected, depending on the type of investment you’re making. Simply put, you can never escape the risk that a bank or brokerage will fail, so you shouldn’t go without FDIC or SIPC insurance.

Use the FDIC website to make sure your bank is backed by the FDIC. Once you’ve confirmed a given financial institution is covered by the FDIC, use the agency’s Electronic Deposit Insurance Estimator to learn the specifics of the kind of coverage you’ll receive. You can then keep that information on record so you can always have it on hand.

The same applies if you hold securities investments with a brokerage. Check with your individual brokerage firm to make sure they’re insured by the SIPC. If you’re working with a firm that is currently or was recently insured by the SIPC but no longer is, the SIPC will protect your investments for up to 180 days after the brokerage firm ends their SIPC membership. If this happens, you may want to consider switching your investments to another brokerage firm that is insured by the SIPC.

SIPC vs. FDIC: Why you need them

It’s essential to protect your money, whether it’s stored in a checking account, savings account, a CD or any type of security. The FDIC and SIPC were established to do just that — protect consumer finances.

The SIPC protects money in an account when its purpose is to purchase securities. There may be instances where you’re holding money in an account not meant for investing, like when a brokerage firm offers a cash management account, similar to a checking account. In those cases, that’s when you want to ensure those funds are FDIC-insured, especially in the event the SIPC decides it won’t provide coverage.

Every investment is worth protecting, so before you commit to an investment or a financial institution, do your research to make sure that it is legitimate and offers the kind of insurance you and your assets deserve.