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Maximizing your FDIC Insurance

As a big fan of CDs, I'm concerned about the amount of misinformation floating around out there on how much US Government FDIC or NCUA insurance you can get at each financial institution. Many people think it's limited to $250,000 per institution, while others think they can have unlimited insurance by having no more than $250,000 in each account. Neither is correct. I spoke to David Barr of the FDIC's Office of Public Affairs to get the scoop.

Basic Background
Shortly after the financial crisis, the FDIC insurance limits were raised from $100,000 per depositor to $250,000. This was first done on a temporary basis and then later made "permanent." It's the definition of "depositor" that is murky and allows us to stash quite a bit of cash at each institution. Here's how investors can get millions insured in each institution.

One individual - $500,000
Not much room to maneuver here. You can, however, get more insurance if you are willing to have it go to others when you pass on, but more on that later. The FDIC does consider an IRA a separate depositor and insured separately. Thus, one individual can stash $250,000 in a taxable account and another $250k in an IRA account. Be careful though, Roth IRAs and Traditional IRAs are not considered separately insured from each other.

One couple - $2,000,000
Here, each spouse can put away $250K in a taxable account and an IRA, accounting for the first million, as well as an additional $500K with a joint account. The final $500K comes from Spouse 1 opening up a $250K account in the couple's name and titling it payable upon death (POD) to Spouse 2. Spouse 2 does the same naming Spouse 1 POD.

One couple with three children - $3,500,000
Beyond the $2 million above, a couple can get an additional $500K per child. So an account titled Spouse 1 and Spouse 2 POD to Child 1 gets another $500K in insurance. So insuring three children equals another $1.5 million, or $3.5 million in total. The beneficiaries don't have to be your children, but you obviously must be comfortable knowing the beneficiaries will get the money in the event of your demise. And of course if anyone has a problem coming up with beneficiaries, please feel free to name me as I'm always willing to help out. I'm just that kind of guy.

The FDIC provided this handy chart illustrating the $3.5 million. The only difference from my example is that the final $1.5 million was one account naming a trust that happened to have three children beneficiaries.

Two things to watch out for
1. Interest - If you start at the maximum, then the first day you earn interest you are over the insured amount. It doesn't matter if the interest is paid to your checking or savings account at the same institution. You either need to get interest paid out frequently or start at an amount that will not grow above the insurance limits before maturity. The calculation is as follows using a $250K limit at an Ally Bank 5-year 2.40% APY CD, allowing interest to compound all five years.

($250,000/(1.024))^5 = $222,044.60

The translation is that $222,044.60 will be worth $250,000.00 in five years. For those not wanting to do the math, this MoneyChimp Calculator can do it for you.

2. Estate Planning Implications - When you name a beneficiary on a CD, it overrides any estate planning you may have already set up. Thus, if you name a child as a beneficiary but your will states the dough goes into a trust, the will becomes irrelevant for the CDs in question, so make sure your titling is consistent with your estate plan.

My advice
CDs are the one advantage small investors have. A few million dollars of insurance is meaningful to us but is nothing more than a rounding error for Goldman Sachs. Banks and credit unions can and do go under. Even the big names like Citigroup, Bank of America, and Wells Fargo were standing in line for a bailout from us taxpayers. Never ever go above insurance limits at each financial institution, so check out the FDIC's Electronic Deposit Insurance Estimator (EDIE). When the US Government offers us free insurance, take it.

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