How To Safely Store Deposits If You Have More Than $250,000
Updated: 3-13-2023: The FDIC said it will fully protect depositors after Silicon Valley Bank’s implosion. But wealth advisers say clients should strategize about where they park their cash. How To Safely Store Deposits If You Have More Than $250,000
The collapse of Silicon Valley Bank, and fear that the pain is spreading to other financial institutions, is raising an uncomfortable question: Is it safe to leave a lot of money in a single bank?
Crucially for savers, US authorities also created a new bank backstop that the Federal Reserve said is big enough to protect the entire nation’s deposits, including those above $250,000 at failed banks like SVB.
Still, savers with deposits higher than that key threshold are feeling jittery.
“It will be top of people’s minds,” said Jeremy Keil, financial adviser at Keil Financial Partners in New Berlin, Wisconsin. “Back in 2008, that was one of the biggest things people were asking about, the deposit-insurance limits.”
Bloomberg News interviewed financial advisers around the country, and this is what they said high-deposit savers should know now.
A knee-jerk reaction to the run on SVB would be to rush to open another account at a different bank. But advisers say there are simpler (and likely quicker) ways to increase your FDIC-insured deposits at your own bank.
The FDIC covers $250,000 for individuals’ qualified accounts, but also up to $250,000 for each co-owner of a joint account.
“The easy step is if you’re married, you can get $1 million of FDIC coverage by having a personal bank account in your name, a personal bank account in your spouse’s name and a joint account,” said Keil.
Advisers also recommend spreading some of the cash into accounts for each of your children, or other beneficiaries within your family. These can take the form of revocable trust accounts.
Still, advisers say there is a case to be made for opening up accounts at other FDIC-insured banks.
Single people or those who can’t take advantage of joint-account coverage may find parking some of their cash at another insured bank is a good way to hedge risk.
Thilan Kiridena, founder of Capital Elements, a financial advisory firm in New York, says customers of smaller regional banks in particular may want to diversify if they have cash holdings in excess of FDIC limits.
Regional bank stocks were hit particularly hard on Monday as investors fled the sector despite assurances from regulators.
“In a situation like this, the more regional banks, the smaller community banks would be some of the first banks to absorb today’s pressure,” Kiridena said.
“If you’re working with a smaller bank, a community bank and you know that the deposit strength or the ability to raise capital for those banks is limited, I think it would be a rational decision today to move it to a safer bank.”
A larger question money managers have for people worried about their FDIC limits: Why are you sitting on so much cash in the first place?
Higher interest rates have made holding cash in high-yield savings accounts much more appealing than it was a year ago, but there are even more attractive opportunities in short-term Treasury bills, which are liquid and virtually risk-free.
“Shorter-term investments right now are certainly benefiting from the higher interest rates,” says Liz Miller, president at Summit Place Financial Advisors in New Jersey.
“Instead of a bank account, you might even look at a three-month Treasury bill, which is very temporary and still has very good rates and is fully guaranteed by the US government.”
Miller also said there’s a good chance the Federal Reserve slows down its rate-hiking path in response to the turmoil in the banking sector.
This supports her strategy of investing now in short-term Treasuries and bonds to take advantage of the higher interest rates before a potential slowdown from the Fed.
Despite the worry, advisers caution that the US does not appear to be on the precipice of another 2008-style financial crisis, let alone something like the Great Depression.
“Don’t keep cash,” said Keil, adding that he has to talk a lot of people down from holding physical currency at home because they are worried about the banking system.
Home insurance policies may not cover 100% of the value of your cash, plus it will lose value over time because of inflation.
Advisers say being prepared is key, but warn against going overboard in a situation that so far seems to be confined to a few regional banks with large exposure to the tech sector.
“I wouldn’t be using this as the foreshadowing for the rest of the economy,” said Marc Scudillo, managing officer at EisnerAmper Wealth Management in New Jersey. “It’s important to be selective and diversified.”
It’s also important to be cautious that there may be a slowdown in grow
Is My Money Safe? How To Protect Yourself From A Bank Collapse
The FDIC covers up to $250,000. But if you have $1 million, should you put your money in four different banks?.
Skittish savers can protect their deposits in many different ways if they are uneasy about the safety of their money after the failure of Silicon Valley Bank.
Federal authorities rescued SVB’s customers Sunday, guaranteeing all deposits including those in excess of the $250,000 limit normally covered by the Federal Deposit Insurance Corp., or FDIC.
But that maneuver has done little to quell concern among savers, say financial advisers. These advisers say that those with large deposits should take this moment to make sure their money is safe from future bank failures.
First, it pays to understand how FDIC coverage works and to tally up exactly how much money you have in your accounts and how to make the most of these protections.
Most investment and retirement-account assets aren’t FDIC-insured, but in the event your brokerage firm fails, your money may be protected by the Securities Investor Protection Corp. (SIPC).
At any U.S. bank, accounts with balances up to $250,000 a person are protected. It is easy to make that $250,000 multiply, however, given there is coverage of $250,000 for each type of account at each bank.
A married couple, for example, is eligible for $500,000 protection on a joint bank account and $250,000 for each of their individual accounts, for a total of $1 million in coverage at a single bank.
Today, banks are much safer for consumers because of the FDIC and other financial regulations that require banks to hold more reserves, but it is still important that savers understand all of the risks, said Greg McBride, chief financial analyst at Bankrate.
“Leaving money in a bank account in excess of the Federal Deposit Insurance limit is like driving around without your seat belt. You’re inviting a disaster,” he said.
Before the deal was announced, Silicon Valley Bank customers risked losing up to $150 billion since many accounts held balances in excess of the $250,000 limit. If you have more than $250,000 in liquid assets, here are strategies to consider:
Open Multiple Accounts
The FDIC was established 90 years ago to restore trust in the financial system after customers lost money in a series of bank failures during the Great Depression.
The original coverage limit of $2,500 has been increased periodically because of inflation and periods of financial strife, mostly recently in 2008 when the coverage was raised from $100,000 to the current limit.
The most obvious way to boost FDIC coverage is to open multiple accounts. Checking and savings accounts owned by the same person aren’t considered separate categories for FDIC purposes, but joint and individual accounts are insured separately.
In addition to joint and individual accounts each getting $250,000 protection per person, families can also increase coverage by opening custodial accounts for their children. Each would be eligible for another $250,000 in coverage. The FDIC has a calculator to estimate your total coverage.
There are no limits to the number of accounts an individual can have covered, if they are held by different institutions. Customers could theoretically open 200 accounts at 200 different banks to get $50 million of coverage.
Of course, managing relationships with many different banks and juggling the corresponding statements can get burdensome.
Add Beneficiaries To Your Accounts
Designating specific people, or nonprofit organizations to inherit funds after the account owner’s death is another way to increase protection. FDIC insurance generally will cover up to $250,000 in deposits for each unique beneficiary.
For example, a trust account with five beneficiaries would be insured up to $1.25 million.
There are no limits to the amount of beneficiaries you can have insured, but determining coverage amounts for trusts where funds that aren’t divided up equally or have conditional clauses can be complicated and require the advice of a financial adviser.
One way to manage the multiple accounts necessary to increase FDIC coverage is to have your bank do it for you. Deposit swapping networks such as IntraFi Network LLC work with multiple banks to separate large deposits into amounts below the federal insurance limit and can protect balances up to $150 million.
Using a network allows customers to get the insurance benefit of having multiple banks while dealing with only one bank.
Customers can choose to keep the money in checking accounts, money-market accounts or certificates of deposits depending on their liquidity needs.
Customers don’t have to pay a fee for the service but might have to accept a slightly lower interest rate for the convenience.
Brokerages such as Fidelity Investments can also join with FDIC-insured banks to increase the coverage they offer to clients in cash-management accounts. For example, Fidelity cash-management accounts can offer more than $1 million in protection.
Credit unions are nonprofit financial institutions that are an alternative to commercial banks. These accounts aren’t FDIC insured, but they have their own form of federally backed deposit coverage through the National Credit Union Share Insurance Fund, with the same $250,000 limit.
Though U.S. Treasurys aren’t covered by FDIC insurance, they are backed by the full faith and credit of the federal government.
In other words, buying U.S. bonds is a low-risk alternative to stashing money in a bank.
Unless you are preparing to make a very large purchase, such as a house, there is no reason for most people to keep more than $250,000 in cash on hand, said Eric Sterner, chief investment officer at Apollon Wealth Management.
“I would really just encourage clients to invest that money, especially in fixed-income markets,” Mr. Sterner said. The Federal Reserve has raised interest rates several times over the last year creating attractive, low-risk opportunities for even the most conservative investors, he added.
If a brokerage fails, customer assets should be safe, even though the accounts aren’t insured by the FDIC.
The SIPC, a federally mandated nonprofit, intervenes on behalf of customers when client assets are missing and a brokerage firm is unable to meet its obligations to customers.
If the firm fails but there are no customer assets missing, the firm might seek to transfer customer accounts to a different brokerage firm.
SIPC covers up to $500,000 per account, including up to $250,000 in cash.
SIPC replaces missing securities including stocks, bonds, mutual funds, ETFs and certificates of deposit. It doesn’t cover investments that aren’t SEC-registered, including fixed annuity contracts and limited partnerships.
Are 401(k) Accounts Insured?
If a company with a 401(k) plan files for bankruptcy, the plan’s assets are protected. The federal Employee Retirement Income Security Act, the 1974 law that governs 401(k) plans, requires the assets to be held in trust.
The trust also protects employees’ money if your 401(k) plan administrator goes bust.
How To Keep Corporate Accounts Safe Amid Bank Collapse Jitters
Experts explain some little-used tools for setting up cash management systems and maximizing insurance.
Following the failures of US banks Silvergate Capital Corp., Silicon Valley Bank and Signature Bank, executives and business owners are realizing their corporate accounts aren’t necessarily insured by the Federal Deposit Insurance Corp.
“I don’t think entrepreneurs and executives were paying attention to that,” says corporate accountant John Pennett, a partner at Eisner Advisory Group in Iselin, New Jersey. “Historically, venture-backed or private equity-backed companies are sitting on $10 million to $15 million, because they just raised money that needs to last three to four years, and the board didn’t really care where they put the money. Now that’s going to be an area of discussion.”
Accounts are automatically insured up to $250,000 per depositor at FDIC-insured banks. But many companies hold millions or tens of millions of dollars that must be available for payroll or operations. Not all organizations feel the need to keep every dollar insured. “It just comes down to risk tolerance for folks,” says Nancy Presnell, partner at law firm Frost Brown Todd in Louisville.
“It’s a question of ‘How much time do I want to spend on this? And how much of a gamble am I willing to take?’” US regulators have recently discussed the viability of temporarily expanding insurance to cover all deposits, an outcome that would likely be short-lived—and only happen if confidence in the banking system worsens.
Here’s How Bank Experts Say Cash Management Systems Should Be Set Up And How To Maximize Insurance On Accounts:
Step 1: Choose A Bank
The first priority is choosing a bank that is financially healthy. “Everyone should always do a financial analysis, but no one bothers,” says Jay Hack, a partner at New York City-based law firm Gallet Dreyer & Berkey. “It doesn’t require a Ph.D. in economics, just a moderate amount of experience and some skepticism.”
Financial documents are available on bank websites, and an accountant, attorney or banker from another institution can look them over. In the US, regional banks, which have mostly local investments and comprehensible strategies, are easier to evaluate.
Someone with reasonable financial experience can scan and assess whether a bank is solid and safe. Experts suggest choosing multiple banks—at least one large and one regional—and making sure that each is well-capitalized, has good liquidity and isn’t concentrated in one or two industries. Silicon Valley Bank was a “walking time bomb,” Hack says. “There were a lot of strong indicators of potential problems.”
One caveat: Some banks have loan agreements that require companies to keep all or most of their banking with that institution. “I wonder if we’ll see some pushback on that, just so that companies can achieve a little more diversification,” says business lawyer Tyler O’Reilly, an attorney at Harris Beach, based in Pittsford, New York.
Step 2: Set Up Accounts
Many Organizations Have Three Accounts (Or Account Groups), According To Pennett:
* A Principal Operating Account Through Which Transactions Run;
* A Payroll Account Funded By The Operating Account;
* An Interest-Earning Money Market Account Funded By Excess Funds In The Operating Account.
To avoid the money market account exceeding $250,000, one option is a sweep account, which automatically transfers balances over a preset limit into other accounts. For example, a smaller company might set up a sweep that moves balances higher than $250,000 into an external account daily, thereby maintaining FDIC insurance.
If excess funds continue to balloon and aren’t immediately needed, congratulations. One strategy Pennett suggests is a monthly purchase of government-security-backed funds. These aren’t FDIC-insured, but they’re considered extremely safe.
Step 3: Maximize FDIC Coverage
Banks offer tools to keep larger balances insured, but few companies take advantage of them, Pennett says. All of the options come with costs, and “there are logistical details that can make these tools cumbersome,” says Jared Craighead, chief of staff at Dallas-based Vista Bank. (The FDIC offers a handy insurance calculator here.) Here are three ways to maximize FDIC coverage:
* Intrafi Network. The Intrafi network of more than 3,000 banks can keep quantities in the range of $100 million under FDIC insurance. Here’s how: If a corporation deposits $1 million, the bank will remove $750,000 and deposit three amounts of $250,000 in three other banks, thereby maintaining FDIC insurance coverage for the whole balance. Intrafi handles the bank-to-bank dealings, so company executives simply see their total balance, not dozens of bank accounts.
* Certificates of Deposit (CDs). Businesses can invest in CDs of as much as $250,000, each held by a different FDIC-insured bank. Some banks offer this service; Intrafi offers a program called the Certificate of Deposit Account Registry Service (CDARS), which can insure amounts up to about $50 million.
* Lines of Credit. Some companies use a line of credit for working capital. Because the funds don’t enter the corporate account until they’re drawn from the line of credit, this bypasses the need to insure large balances. The downside: Depending on the arrangement, the money might take a couple days to hit an account.
Step 4: Get An Emergency Fund
The past week has demonstrated that access to funding is essential, even if a bank fails. “It’s good practice for companies to have lines of credit, even if they don’t use them,” Craighead says. “And you don’t want to have your emergency line of credit at the same bank as all your assets.” The size of a line of credit is largely determined by a company’s cash flow.
Step 5: Evaluate Client Accounts
What about money held in vendor, law firm or consultant accounts? On March 14, Hack addressed an emergency webinar for the New York State Bar Association. He fielded queries from 750 lawyers who asked things like, “What if I’m holding client money that’s more than $250,000? Should I be worried?” The answer: kind of.
This is a common occurrence. For example, if a company purchases a $3 million office building, a 10% down payment of $300,000 will land in a law firm’s escrow account.
With proper paperwork, companies that hold client money are considered fiduciaries of a trust, and each client’s holdings are covered by FDIC insurance up to $250,000. If the amount is more than that, “the firm can either put it in two banks, which is, for a variety of reasons, a pain in the butt,” Hack says.
“Or you get comfortable with the idea that you have selected a bank that’s not going to fail.” It is worth asking vendors about their cash management strategies.