There are many ways you can lose money in this world, so it’s important to know whether your money is protected against losses and how to safeguard it.
Bank and Credit Union Failures
Banks and credit unions are generally very safe places to keep your money. You are not exposed to market fluctuations, and most institutions are insured by the U.S. government.
Sometimes banks fail. The investments you make do not perform, and they no longer have the funds necessary to meet customer requests. If there is an attack on the bank, things can fall apart faster. Fortunately, most struggling banks are purchased by other banks, and customers of the failed banks become customers of the purchasing banks, and usually, no one loses money. In many cases, customers barely notice when the bank fails.
To ensure your money is as safe as possible, check that your money is insured by the FDIC. If you are using a credit union, your money is safe as long as the credit union is insured by the NCUSIF. Remember to keep your balances below the limits ($250,000 per depositor per institution) to reduce risks.
Retirement Accounts
Retirement accounts in banks and credit unions are insured just like any other account. Your accounts may be combined when considering the $250,000 limit, so do not assume each account has its own limit.
Depending on how your accounts are organized, you may be able to cover more than $250,000 in one bank, but you will want to verify that with the FDIC.
Investment Accounts
If your money is held in firms that do not provide protection by the FDIC or NCUSIF, it may still be protected. Many investment accounts offer coverage by the Securities Investor Protection Corporation (SIPC). This protection only covers you if your brokerage firm fails and does not protect you against market losses or bad advice. SIPC coverage is good for up to $500,000 per account type. (Only $250,000 of that can be held in cash.)
Note: FDIC and SIPC insurance provide protection for different types of accounts, so make sure you understand the coverage that applies to your assets.
Employee Retirement Plans
If you are like many, your largest investment is in your workplace retirement plan, such as a 401(k) or 403(b) plan. To know how protected you are, start by checking whether your account is insured by FDIC (which is unlikely) or covered by SIPC insurance.
If your employer goes bankrupt, your money is usually protected. Most retirement plan assets are not held by the employer but are in a trust that the employer cannot withdraw from. However, if the employer faces difficulties, it’s good to monitor your accounts: make sure no one is making withdrawals, and that your contributions are actually going into the plan with each pay period.
Note: If you participate in an unqualified plan, such as a 457(f) plan or a top hat plan, you may lose money if your employer goes bankrupt. Those assets are considered the property of the employer and may be available to creditors.
Risks Associated with 401(k) Accounts
What if your 401(k) account loses money in a market crash? Can you insure against that? Generally, you cannot. Most 401(k) plans are not insured by the FDIC. Some plans offer one or two investment options within the plan that are insured by the FDIC, but most investment options are not.
Some employer plans offer products from insurance companies that may help you in case of a market crash, but don’t raise your hopes too much. Insurance protection (often in the form of annuities) for 401(k) balances is not something most employers offer. These guarantees are only as strong as the insurance company offering the guarantee, so you depend on the financial strength of that company without government backing. Moreover, this protection comes with additional fees, expenses, and restrictions, so you will want to read the disclosures carefully before opting to utilize them.
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The end, the closest thing you can get to ensuring safety is a deposit (within limits) in a bank account insured by the FDIC or a credit union insured by the NCUSIF. The only risk is that inflation can affect your savings in the long term.
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Sources:
- FDIC. “Status of Washington Mutual Bank Receivership.”
- NCUA. “Share Insurance Fund Overview.”
- FDIC. “Your Insured Deposits.”
- SIPC. “The Securities Investor Protection Corporation (SIPC) Protects Customers if Their Brokerage Firm Fails.”
- Wells Fargo. “401(k) Plans.”
Source: https://www.thebalancemoney.com/failed-institution-protection-315787
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