When you deposit funds at the bank, you can rest easy knowing that the biggest threat to your money is probably your own spending habits. Thanks to the Federal Deposit Insurance Corporation (FDIC), you never have to worry about the safety of your bank deposits. But what about the money your pour into retirement accounts, like an IRA or a 401(k)?
The FDIC protects your covered bank deposits in case the institution goes under and is no longer solvent. This government corporation insures approximately $12.6 trillion dollars across 5,406 institutions in the country. When it comes to retirement accounts, the Securities Investor Protection Corporation (SIPC) protects your funds, although SIPC insurance works somewhat differently than the FDIC’s guarantee.
Read on to find more on exactly how and under what circumstances the SIPC protects your investment accounts.
What does SIPC insurance protect you from?
“SIPC is an important part of the overall system of investor protection in the United States,” said Josephine Wang, CEO of the SIPC. “SIPC works to restore investors’ cash and securities when a brokerage firm fails. Without SIPC, customers at financially-troubled brokerage firms might lose their investments forever.”
In the event that the broker holding your retirement funds goes out of business, SIPC insurance covers up to a combined $500,000 worth of cash and securities, such as stocks and bonds, per account. That protection covers up to $250,000 in cash in the account.
In other words, if you have $400,000 in securities and $100,000 in cash in your brokerage account, and you see on the news that the entire company’s leadership was charged with acting as a front for drug traffickers and the brokerage fails, you can rest easy so long as it registered with the SIPC.
In the above scenario, if your brokerage account had $500,000 in securities and $50,000 in cash, you wouldn’t be fully covered because the total value in the account exceeds the SICP’s $500,000 limit.
For the purposes of the SIPC’s insurance plan, covered securities include:
- Treasury securities
- Certificates of deposit
- Mutual funds
- Money market mutual funds
Some notable investments that SIPC does not cover are:
- Any investments in foreign currencies
- Commodity futures (an agreement to buy or sell a certain commodity, such as gold or frozen orange juice, at a specific time and price in the future).
What types of losses are not covered by the SIPC?
SIPC insurance only makes you whole if your brokerage goes out of business. It does not cover losses that stem from the regular ups and downs of markets, which are part of the normal risks and rewards of investing. SIPC insurance won’t help you if your wealth manager makes terrible investment decisions, or if the account underperforms.
Unlike the FDIC, which promises to replace every last penny you lose in an insured account should the bank go under up to its $250,000 per account limit, SIPC insurance doesn’t take into account the value of investments when you purchased them. It only reimburses you for the market value of the investments when the brokerage went under — plus the full value of cash accounts up to the $250,000 cap.
So, if you bought 100 shares of Pets.com at $11 a share in February 2000 but your brokerage firm went under in November 2000 when Pets.com was trading at $0.19 a share, guess what? SPIC insurance is only obligated to return 100 shares at the price the stock currently trades for.
How does SIPC insurance compare to FDIC insurance?
What does it cover?
Securities and cash related to the purchasing and trading of those securities in an account with an SIPC-registered broker
Deposit accounts of an FDIC bank or financial institutions, such as a checking account, savings account, money market account, etc.
What are the limits of coverage?
$500,000 per account (per separate capacity*), with up to $250,000 for cash
$250,000 per account (per ownership capacity/account type)
Does the insurance require customers to opt in?
*See the section below for a more detailed explanation of “separate capacity.”
What if I have multiple accounts with the same brokerage?
The issue of multiple accounts with the same broker can quickly become confusing. We can’t stress enough that you should consult directly with your brokerage firm or financial institution about how SIPC insurance covers multiple, separate accounts with the same broker.
In general, the SIPC provides you with the maximum amount of coverage for each separate account you have, as long as those accounts are classified as a different type, what is officially termed as “separate capacity.”
Here are some examples of what the SIPC considers a “separate capacity,” which you may recognize as different account types:
- Individual accounts
- Joint accounts
- Corporate accounts
- Trust accounts created under state law
- Individual retirement accounts (IRAs)
- Roth IRAs
- Accounts held by executors for estates
- Account held by guardians for a ward or minor
To help clarify this important point, here are a few scenarios where you might have multiple accounts at the same brokerage with SIPC coverage:
- You have one individual account open in your name: No surprises here, your account is covered up to $500,000.
- You have two individual accounts open in your name: Because an individual account is one type of “separate capacity,” your $500,000 worth of coverage is spread across both accounts.
- You have a traditional IRA account and a Roth IRA account: Each of these accounts is treated as a separate capacity, and so each receives the full $500,000 amount of coverage.