These days, there’s a good chance your brokerage account will function much like an account from a different financial institution. In addition to offering access to investments, you might also be able to use bank accounts, including access to checking accounts, savings accounts, and even life insurance policies, in some cases.
However, even if broker-dealers are offering these other products, it’s important to note that some of them use an FDIC-insured bank to manage the banking products. As a result, you might have FDIC insurance coverage on some products and SIPC insurance on others.
As you consider where to put your money, it’s important to understand the differences between SIPC vs. FDIC insurance. Here’s how each works and what it covers.
How does SIPC insurance work?
The Securities Investor Protection Corporation (SIPC) is a nonprofit membership corporation that was created in 1970 in the wake of several broker failures. The resulting losses to customers prompted the creation of this insurance membership, and now investors are protected, to some degree, in the event of broker-dealer failure. The law was modeled similarly to the idea behind the Federal Deposit Insurance Corp.
With SIPC insurance, member broker-dealers pay into an insurance fund. If there’s an issue, the SIPC insurance fund pays out to compensate customers if a covered brokerage goes under. When a broker is a member of SIPC, account holders receive protection against the loss of securities (stocks, bonds, exchange-traded funds, money market funds, mutual funds, Treasury securities, etc.) and cash in the event that a brokerage firm fails. Your account is typically protected up to $500,000, which includes a cash limit of $250,000.
It’s important to note that the SIPC doesn’t necessarily provide cash for securities. Instead, it attempts to replace the securities in your account. Additionally, SIPC insurance doesn’t cover investor losses due to fluctuations in the market. There are also other coverage limits to be aware of. According to SIPC.org, SIPC insurance does not cover futures contracts, foreign exchange trades, or investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission.
With this coverage, only the cash meant for the purchase of certain securities is protected. Cash meant to purchase commodities is not included in SIPC protection. Before you assume your investment account is protected, review what you use the money for, and what purpose it serves, as that can make a difference.
How does FDIC insurance work?
The Federal Deposit Insurance Corporation (FDIC) is a federal agency that was created by the U.S. government in 1933 in response to the bank failures during the Great Depression. So many banks failed and many people lost their life savings because banks couldn’t honor their obligations to consumers. The idea was to protect depositors in the event of a bank failure.
Banking institutions pay premiums to the FDIC, and if a covered bank fails, you could get your money back, or have it automatically transferred to another institution. For the most part, you can probably expect to get your money back, up to the coverage limit, if a bank goes under.
Standard FDIC insurance covers $250,000 in each ownership category at each bank. So, it’s possible to have more than $250,000 protected at one bank, if you have accounts across multiple ownership categories. For instance, if you have $250,000 in a single account and $100,000 in a joint account, you could have coverage for all of it, as single accounts and joint accounts fall under different ownership categories. Talk to your bank about what’s protected and how much insurance you have.
Bank deposit accounts, including savings, checking, certificates of deposit, money market deposit accounts, and certain retirement accounts typically have FDIC coverage. Generally, this type of insurance does not cover money invested in stocks, annuities, life insurance policies, or money market mutual funds.
SIPC vs. FDIC insurance compared
|SIPC insurance||FDIC insurance|
|What it covers||Securities and cash held in a brokerage account and meant to purchase securities||Deposit accounts, including savings, checking, CDs, and certain types of IRAs|
|Typical insurance limits||$500,000 per account type per institution (including $250,000 cash limit per account type per institution)||$250,000 per ownership category per institution|
Investments vs. deposits
It’s important to note that SIPC insurance typically covers investments. These are assets that can expect to see a higher return based on how much capital you invest. However, investments aren’t guaranteed. In fact, you can potentially lose money on investments. Although you have a greater chance of a bigger return, you also have the chance of a loss. When learning how to invest money, it’s important to be aware of this.
Deposits, on the other hand, are meant to be safe and are generally covered by FDIC insurance. When you deposit money at a financial institution, you expect the money to remain safe and accessible. You won’t receive a large return for your deposits, but you do know your money is safe and liquid. Balancing how much you keep in deposits and how much you invest is an important part of learning money management so you can grow your wealth while taking precautions.
Another difference between FDIC vs. SIPC is the amount of coverage each provides. The typical SIPC coverage limit for an investment account is $500,000, with $250,000 of that included as a cash limit. It’s worth noting that the $500,000 amount (and $250,000 cash limit) is per account type per institution. For instance, you might have a Roth IRA and a SEP IRA at the same brokerage, and both would be covered up to $500,000. Or you might have Roth IRA and a SEP IRA at different brokerages, and both would be covered up to $500,000. The $250,000 cash limit for coverage would apply to all accounts.
On the other hand, FDIC insurance covers up to $250,000 per ownership category per financial institution. It’s important to make that ownership category distinction with FDIC insurance. For example, a single savings account is protected for up to $250,000, while a joint savings account has that protection for each co-owner. The share of ownership in the account is added up separately with other joint accounts they have a share in and that amount is insured up to $250,000.
Understanding your coverage can help you decide where to keep your money, and whether you need to spread it out. In some cases, it can make sense to hold money in different brokerages or with different financial institutions in order to make sure you aren’t above the limits. Consider your options and how you can keep more of your money safe.
Both SIPC and FDIC insurance are designed to help consumers in the event that a brokerage or bank fails financially. You won’t receive protection from your own decisions or market losses, but if the broker-dealer or other financial institution is at fault, and it has the right coverage, your assets should be protected.
Carefully check to make sure that whatever firm you choose for your assets has the right insurance. That way, you can be reasonably confident that if something goes wrong for the brokerage or the bank, you can get some of the value of your assets back.
It’s also important to note that if you use a credit union, you should look for National Credit Union Administration (NCUA) insurance.
Which is better, FDIC vs. SIPC insurance?
Neither is better than the other. Both of these types of insurance are designed to help protect your assets from company failures. For your deposits, make sure you use an FDIC-insured bank. For your investments, make sure the brokerage has SIPC insurance. That way, more of your assets are protected in the event that your bank or brokerage fails.
Is FDIC insurance per account or per bank?
FDIC insurance is based on ownership categories. So all accounts in the same ownership category at the same bank are added together and protected for up to $250,000. For example, if you have $100,000 in a savings account, $200,000 in CDs and $10,000 in your checking account with one bank, not all of your money is protected if all these accounts are owned by a single owner (you).
If you have questions about whether all of your money is fully covered, you can talk to your bank, or use a handy tool from the FDIC to estimate your coverage.
Is SIPC coverage per account or per brokerage firm?
SIPC insurance recognizes different account capacities at each brokerage firm. For example, if you have an individual account at a brokerage, as well as a joint account with your partner, each account has its own $500,000 limit. You can also receive protection at different brokerage firms. The best brokerage accounts have SIPC insurance, so make sure you’re covered before deciding where to invest.
The bottom line
There’s no need to try to decide between SIPC vs. FDIC insurance. Both types of insurance are extended automatically, as long as you use a covered financial institution or brokerage. Both FDIC and SIPC insurance are designed to protect you in the event that the firm providing you with financial services fails. Many people already look for FDIC-insured banks, but it’s also important to check for SIPC insurance before investing money. Most of the best investment apps are from brokerages that are SIPC members.
However, it’s important to pay attention to limits on both these types of insurance. Limits on how much you’ll get back if a bank or broker fails can mean that those with large accounts might not be fully covered. Take the time to review your accounts regularly to see whether you need to change how you manage your money and where you keep it.
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