New FDIC Limits
By James Tissot, CFP®
In case you haven’t heard, the world markets are in turmoil. (And if you haven’t heard, perhaps you should check your pulse.) The underlying causes of the current crisis were the subprime mortgages that were bundled into CMOs (Collateralized Mortgage Obligations) and CDOs (Collateralized Debt Obligations). It would be impossible to explain those products in as short an article such as this, so we will save that for another day. But they have led us to where we are today; a credit crunch based upon a lack of liquidity and a loss of confidence. Amidst all the clamor in reaction to the “bailouts” coming out of the government, one of the tools being used to instill confidence may have gotten lost in the din; an increase in the FDIC limits.
By the way, just a tidbit of information that I can’t resist doling out is the full title of the original bill: “To amend the Internal Revenue Code of 1986 to provide earnings assistance and tax relief to members of the uniformed services, volunteer firefighters, and Peace Corps volunteers, and for other purposes.”
FDIC (Federal Deposit Insurance Corporation) deposit insurance covers the balance of each depositor's account, dollar-for-dollar, up to the insurance limit, including principal and any accrued interest through the date of an insured bank's closing. Up to the signing of the $700 Billion “Bailout Bill” on October 3, 2008 the basic insurance amount was $100,000 per depositor, per insured bank. Certain retirement accounts were insured up to $250,000. With President Bush’s October 3rd signing of the bill, the limit for taxable accounts was raised to $250,000 limit as well. The increase of the new limits is set to expire at the end of 2009 and return to limits in place at the beginning of 2008, even though odds are that it will be extended.
The new dollar limit follows the old rules, but perhaps it’s a good time to review them. As stated previously, the new insurance amount is $250,000. That amount is per depositor, per insured bank. A person is able to increase their coverage in a variety of ways. Since the insurance is based on a “per depositor per insured bank” basis, an individual could simply keep their money in several institutions. You could have $250,000 at 4 different banks and be insured for $1 million.
You can also increase your coverage at any one bank if you deposit the funds in accounts with different ownership categories. These categories include the four most common consumer ownership categories: single accounts, self-directed retirement accounts, joint accounts, and revocable trust accounts. There are a few lesser used categories. Therefore a person who has a single account and a JTWROS account with another, would be covered for $500,000.
A point of interest that I just learned is that POD (Payable on Death) or TOD (Transfer on Death) fall under the same category as a revocable trust accounts. So an individual can have a single account and another account with POD beneficiary and be covered for $500,000. But there is a huge caveat! These accounts only get the extra coverage if the beneficiary is a “qualified” relative. A “qualified” relative is narrowly defined. It includes a spouse, child, grandchild, parent or sibling. Step-parents, stepchildren and adopted children are also allowed. Nieces, nephews, aunts, uncles, cousins and unmarried “significant others” are excluded from this extra protection.
We’ll see where the crisis leads us. The Fed is running out of tools to curb the decline in confidence and in the markets. On the day I wrote this, they lowered the feds fund rate by .5% and the Dow closed down 189 points. Let’s hope their efforts to restore confidence take effect soon.
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