Are IRAs Safe?
Are IRAs Safe?
Retirement accounts are federally insured up to @250,000 per account at every bank. Congress raised the limit from $100,000 in 2006. This insurance is only for federally insured deposits.
The $250,000 limit for federal deposit protection applies to retirement accounts at banks and savings associations insured by the FDIC, as well as credit unions insured by the National Credit Union Administration (NCUA). (For non-retirement accounts, the FDIC or NCUA limit temporarily increased to $250,000 from $100,000 as part of 2008 Economic Stabilization Act, effective Oct. 3.)
The federal insurance coverage for retirement accounts applies to traditional and Roth IRAs, simplified employee pension (SEP) IRAs and savings incentive match plans for employees (SIMPLE) IRAs. In addition, the coverage also includes self-directed Keogh accounts, 457 plan accounts for state government employees and self-directed employer-sponsored defined contribution plans, including 401(K) and SIMPLE 401 (k) accounts.
DEFINING SELF-DIRECTED
For purposes of FDIC insurance, self-directed means that the plan participant can instruct administrators how his or her retirement funds are to be invested, including the ability to direct those funds to an FDIC-insured account. A retirement plan whose only investment option is the deposit accounts of a specified bank is not considered a self-directed account and is not covered by FDIC insurance. A plan for a single employee/employer can limit investments to a single option and will still be a self-directed plan under the insurance rules.
Under the FDIC/NCUA rules, all of an individual’s retirement accounts at the same insured bank are added together and insured up to a limit of $250,000. Thus, if you have $200,000 in a traditional IRA and $100,000 in a Roth IRA at ABC Bank, federal deposit insurance would cover $250,000 of those accounts, leaving $50,000 uninsured.
BENEFICIARY ISSUES
If an individual has a personal IRA and an inherited IRA at the same bank, they are insured separately for $250,000 each. Naming different beneficiaries on an individual’s retirement accounts will not affect the coverage limits for the individual, according to the rules.
If someone is a beneficiary of an account and not an owner, They have up to $250,000 in coverage on this account in addition to the $250,000 in coverage on their own personal IRA account. Retirement accounts are separately insured from any other deposits you may have at the same institution.
MOVING PARTS
For each IRA, you can do a rollover no more than once every 12 months (the once-per-year IRA rollover rule). If someone has done a rollover to or from an IRA within the past 12 months, they must wait until 12 months (365 days) have passed before doing a rollover from the same IRA. What happens if they violate the 12 month rule? They will owe income tax on the second withdrawal, plus 10% penalty if they are under age 59½, and those funds are no longer IRA funds.
The bottom line, then, is that you must check the history of each IRA account before determining whether you can do a rollover from it. Without this careful due diligence, you risk paying taxes and penalties on your retirement funds.
When a bank fails, depositors usually want to get their funds out as quickly as possible. That could mean receiving a check or cash. If the account is an IRA, a check made out to you is considered a rollover, and the 60-day rule and the once-per-year rollover limit both apply. If other IRA funds were rolled to or from the IRA account within the past 12 months, the depositor will have a taxable distribution.
To add insult to injury, if the funds come from an IRA at a failed bank and the balance is over $250,000, then, the depositor might only be able to withdraw $250,000 (the FDIC insured amount). But since that $250,000 cannot be rolled over to another IRA (because IRA funds were already rolled to or from that IRA within the past 12 months), then the entire $250,000 will be taxable and possibly subject to the 10% withdrawal penalty.
NON-BANK PROTECTION
Remember that FDIC/NCUA insurance applies only to bank deposits such as checking accounts, savings accounts, CDs and others. There is no federal deposit insurance for IRA investments in mutual funds, stocks, bonds and annuities; even if they are purchased from an FDIC- or NCUA- insured institution.
However, there is some protection for investments through the Securities Investor Protection Corp. (SIPC). Virtually all securities brokers belong to this organization. SIPC members contribute to a reserve fund that will reimburse investors up to $500,000 per customer, including up to $100,000 in cash.
Of course there is no SIPC reimbursement for investments that lose money.