Massive Banks Failing; Is Your Money at Risk?

by Kevin on July 17, 2008

Bank Failures

(Image by No Debt Plan)

IndyMac failed last week and has the great honor of jumping to 2nd place in the coveted list of “largest bank failures in the United States… ever.” The massive investment bank Bear Sterns was bailed out by the Fed and JPMorgan earlier this year. Fannie Mae and Freddie Mac are being propped up by the government as I speak.

There is a feeling of panic on Wall Street. For account holders at IndyMac bank, Monday morning was also full of distress.

Is your money safe? What if your bank went under out of the blue? Could you pay your bills, fill your tanks with gas, and put food on the table?

What’s the FDIC?

FDIC stands for Federal Deposit Insurance Company. They insure that the money you have in your bank account — up to a certain point — is guaranteed to be yours. As in, you can’t lose it if the bank goes under.

A quick example: you have a checking account and a savings account at ABC Local Bank. The checking account currently has $6,000 in it; the savings $15,000. ABC wrote some seriously poor mortgages, over-leveraged its assets, and is now going under as a business.

You walk to the bank in town one morning to deposit a check your Mom sent you for your birthday. To your surprise, the doors are chained shut and a notice is on the window. That notice informs you the bank is going under and the FDIC is taking over.

Is all of my money safe?

For average Joe American I’ve got to nearly say “Yes!” to this question. However, technically there is a limit. For each bank you hold accounts at, your money is insured up to $100,000. So unless you’ve got more than $100,000 in total deposits at that bank, your money will come back to you.

As a side note, the FDIC likes to take over banks on Fridays. This gives them time to settle into the systems over the weekend and insure a smooth transition on Monday morning for those account holders trying to access and withdraw their money.

The FDIC only covers checking/savings accounts, right?

Wrong. The FDIC will also cover IRA accounts up to $250,000. This was a surprise to me as I had always heard the typical $100,000 insurance protection mentioned. So if you also opened up Roth IRA with ABC Local Bank, your account is “safe” up to $250,000. Hopefully in the future you will have more than that, but that would definitely cover me personally right now. (I wish it weren’t so!)

I’m curious as to how that works with the IRA accounts. Are you able to roll over the holdings to a different account, say, one with Vanguard? Or do you have to pull the money out and reinvest? I’m guessing the former because the latter could make for a messy tax situation.

The Bottom Line

If you have less than $100,000 in various checking/savings accounts with a bank, your money is insured 100% by the FDIC.

If you have less than $250,000 in Individual Retirement Accounts at a bank, your money is insured by the FDIC.

If you have more than $100,000/$250,000 in the above accounts — what are you thinking? Walk across the street, open a new savings account with XYZ Local Bank and give them any money over $100,000 from your savings.

Can you do this with IRAs? That is, can you have three different IRAs with three different institutions, each with $250,000 in them? How many IRAs can you have open at one time? I’ll answer these questions tomorrow.

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Carissa July 17, 2008 at 11:20 am

Thank for this information! I’ve been worried about this a bit. We’re part of a credit union, so I haven’t worried too hard, but still–one wonders.

I have felt like socking away some actual cash, too, just in case. You know, keeping a Mattress Fund around. What is your opinion on that? I know a lot of financial folks would rather see that money in some sort of money market or IRA, making money, but I’m think it couldn’t hurt to have some hard cash socked away in case of emergency. What do you think would be a good amount? Enough for a month’s worth of bills and groceries? Just living expenses? Just grocery and gas money?


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