In the wake of the historic government bailout of Fannie Mae (FNM) and Freddie Mac (FRE), investors wonder which bank will fail next. Indeed, images of customers lined up last July outside offices of the failed IndyMac Bank to withdraw their money are hard to forget. The Federal Deposit Insurance Corp. (FDIC) recently reported that 117 banks, the highest number in five years, are on its "problem" list, and "more banks will come on the list as credit problems worsen."
It's no wonder that some Americans are asking themselves if the money they've accumulated in retirement accounts is adequately protected. "Clients are expressing concerns about whether their accounts are safe. This has occurred because of the demise of both IndyMac Bank and Bear Stearns and the major decline in most bank and financial stocks," says Kevin Reardon, a financial planner in Brookfield, Wis.
In general, the answer is that your retirement accounts are safe. Three key factors determine how well your money is protected: the type of account you have, where the account is located, and how much is in each account. Here's a rundown on the rules to help you determine if you need to make any changes in where and how you hold retirement savings in banks, brokerage accounts, and your 401(k).
Broader Insurance Coverage
At this point just about everyone knows your standard bank account is insured by the FDIC for up to $100,000. Less well known is that since 2006, a traditional or Roth IRA, a Simplified Employer Plan (SEP), and several other types of retirement accounts that you hold in an FDIC-insured bank are covered by insurance up to $250,000. The insurance applies to the retirement account in addition to insurance on your other accounts in the same bank. The FDIC does not release its list of problem banks, but it does offer a list of bank rating sources you can consult if you're concerned about a particular institution. If your FDIC-insured retirement account exceeds $250,000, or if you are worried about the bank's financial health, you can move some or all of the asset to another institution. But just make sure you follow the rules for a trustee-to-trustee transfer so you don't get hit with taxes or penalties on a withdrawal.
Retirement accounts housed at a brokerage receive the same protection as other types of brokerage accounts if the firm belongs to the Securities Investor Protection Corporation, an organization funded by securities broker-dealers. SIPC is charged with returning "customers' cash, stock and other securities" in the event a company fails or customer assets are missing. But SIPC rules differ from those of the FDIC, and some types of investments, such as commodities contracts, are not insured by SIPC.