People are confused about FDIC vs. SIPC insurance. Today, I’m here to help with that.
I noticed this last Thursday, during the Robinhood events. I started to notice a TON of confusion on Twitter, Facebook, and Instagram about what the difference was between FDIC and SIPC insurance.
What were people saying?
“It sounds the same? I don’t know”
“I don’t think there’s a difference.”
“Sounds like they both offer $250k of protection, right???”
“So, basically, SIPC is like FDIC but for stocks?”
Heck, many people have never heard of SIPC. I’ve known about FDIC insurance for a very, very long time – after all, you always see references to it when you go to the bank. But I’ve only seen SIPC referenced in the tiny small print I get from my index fund providers.
Lots, and lots, of confusion.
And to be honest, before writing this article, I was also fuzzy on the differences. I knew they were different things and protected different kinds of accounts, but they sounded similar. Now that I’ve dug deep into the details, I can see just how different they are.
I’m here today to help clear up some of that confusion. First I’ll show you a handy infographic summary of the differences, and then we’ll dive deep into each question.
Before I start, a quick disclaimer and a thank you:
- Thank you to my friend
Ms. Money Nerd, who helped me with this article by providing some information on FDIC vs. SIPC and reviewing my infographic - Disclaimer: I have done a lot of research for this article but I don’t work for the FDIC or SIPC and I’m a hobbyist – not an expert. If you want details on the insurance of your specific account please call your bank or broker-dealer
Here are eight things you need to know about FDIC and SIPC insurance.
What Does It Stand For?
FDIC stands for the Federal Deposit Insurance Corporation.
SIPC stands for the Securities Investor Protection Corporation.
What Is FDIC vs. SIPC?
FDIC is an independent agency created by Congress. It offers deposit insurance, supervises and examines banks for safety and customer protections, and manages receiverships (aka bankruptcies). It is both an insurer and a regulator. Deposits are backed by “the full faith and credit of the US government“.
SIPC, on the other hand, is not a regulator. It doesn’t check that its members are sound, safe, and secure. That’s the job of the actual regulators, the SEC (Securities and Exchange Commission) and FINRA (Financial Industry Regulatory Authority).
SIPC was also created by Congress, but it is not an agency of the US. It’s a member-based non-profit organization. It is designed only to protect investors in the case of a bankruptcy of a member broker-dealer. The money to pay their claims comes from fees paid by its members, and interest earned on government securities. They also have a line of credit with the treasury.
I’d like you to note a key difference here – it is not backed by “the full faith and credit of the US government“.
When and Why Were They Founded?
FDIC was created during the Great Depression in 1933-1935. What exactly was happening with banks at the time? It all began with a banking crisis. According to a transcript where FDR talked about this:
“What, then, happened during the last few days of February and the first few days of March? Because of undermined confidence on the part of the public, there was a general rush by a large portion of our population to turn bank deposits into currency or gold. — A rush so great that the soundest banks could not get enough currency to meet the demand. The reason for this was that on the spur of the moment it was, of course, impossible to sell perfectly sound assets of a bank and convert them into cash except at panic prices far below their real value.”
The FDIC was created out of this crisis, to both regulate banks and insure deposits. This was intended to increase customer confidence in the banking system, protect customers from bank collapse, and generally keep the banking system of the US sound.
SIPC was created with a related, but a different, goal at a much different time in history. Back in the late ’60s and early ’70s, there was what was called a “paperwork crunch“. A system designed to handle a trading volume of about 3 million shares a day was handling 21 million. Firms went bankrupt, causing customer losses, and making customers nervous about investing in the market.
Hence SIPC was created to protect investors in the event the broker or dealer they invested with went under.
What Amount Does FDIC vs. SIPC Protect?
Here’s where a lot of people get confused.
FDIC offers $250,000 of coverage per depositor, per FDIC insured bank, per ownership category. There are fourteen distinct ownership categories defined by FDIC, and each of them is insured
Lets do some quick examples to see how this works, because a lot of people get confused here.
- John has $250,000 at a savings account in Bank of Example. He has $250,000 in insurance
- Mary has $300,000 in a checking account at Bank of Example. She has $250,000 in insurance.
- John and Mary get married and create a joint savings account with $250,000 at Bank of Example. They have $750,000 total insurance now.
- $250k for John’s account
- $250k for Mary’s account
- $250k for their joint account.
- Mary transfers $50k from her checking account at Bank of Example to Example United Bank. They now have $800k in insurance.
- $250k for John’s account
- $250k for Mary’s account at Bank of Example
- $50k for Mary’s account at Example United Bank
- $250k for their joint account.
- $250k for John’s account
SIPC offers $500,000 per customer for all accounts at one institution, per “separate capacity“. It also offers $250,000 for cash, but only some kinds of cash, as we’ll go into shortly.
It’s important to understand what “separate capacity” means as you start to accumulate larger amounts of money in your accounts. It not only counts individual and joint accounts as separate, but also IRA’s and Roth IRA’s.
We’ll do a few more quick examples here to illustrate how this works:
- Mary has $600k in index funds in her IRA with Example Lynch. She has $500k in insurance from SIPC in the event Example Lynch goes bankrupt.
- John has $100k in index funds in an after-tax investment account with Example Lynch and $500k in an IRA with a mix of stock index funds and bonds. He has $600k in insurance.
- Mary and John create a separate joint $200k investment account. They now have $1.3 million in insurance:
- $500k for Mary’s IRA
- $100k for John’s after-tax investment account
- $500k for John’s IRA
- $200k for their joint account
- Mary rolls $100k from her IRA at Example Lynch to Example and Trust. They now have $1.4 million in insurance.
- $500k for Mary’s IRA at Example Lynch
- $100k for Mary’s IRA at Example and Trust
- $100k for John’s after-tax investment account
- $500k for John’s IRA
- $200k for their joint account
I’ll be honest, when I first read about all these limits a long time ago – my reaction was “who cares?” The numbers were so high that I figured I would never come close to the amounts where I would need to actually care about these kinds of limits. But if you invest over a long period of time, you may eventually need to become aware of these limits. So it’s a good idea to know they exist, and how they work, even if you’re nowhere close to the limits.
What Kinds Of Accounts Are Protected?
FDIC protects the following kinds of accounts:
- Checking
- Savings
- CD’s
- Money market deposit accounts
- Cashiers checks, money orders, and other bank-issued official items
- Negotiable order of withdrawal accounts
SIPC protects securities, which include the following kinds of accounts:
- Stocks
- Bonds
- Treasury stocks
- CD’s (those issued by a SIPC backed broker, rather than by a bank)
- Mutual funds and index funds
- Money Market Mutual Funds (note the slight distinction from the money market deposit accounts covered by FDIC)
- Other investments defined as a security
- Cash held specifically from the sale of/purchase of securities
What’s Not Protected?
FDIC does not protect the following kinds of accounts:
- Stocks
- Bonds
- Mutual funds
- Life insurance policies
- Annuities
- Safe deposit box contents
- US Treasury bills, bonds, and notes
- Municipal securities, like municipal bonds
SIPC doesn’t protect these accounts:
- Currency
- Commodity futures contracts
- Warrants
- Other kinds of cash besides those held for purchase/sale of securities
Am I Protected From The Value Of My Account Going Down?
For FDIC insured accounts, the answer is Yes.
“FDIC deposit insurance covers the depositors of a failed FDIC-insured depository institution dollar-for-dollar, principal plus any interest accrued or due to the depositor, through the date of default, up to at least $250,000.”
Basically FDIC is designed to protect deposit accounts only. Just because the account is at a bank doesn’t make it a deposit accounts. And the deposit accounts are intended to go up in value, not down. Sometimes they don’t go up very much (see: average savings account interest rate at a big brick & mortar bank), but they go up.
For SIPC the answer is an emphatic NO.
“SIPC does not protect against the decline in value of your securities. SIPC does not protect individuals who are sold worthless stocks and other securities. SIPC does not protect claims against a broker for bad investment advice, or for recommending inappropriate investments.”
I mean, they can’t get much clearer than that.
It’s designed to help you if your broker-dealer goes bankrupt. Securities are designed specifically to help you earn a higher overall rate of return, in exchange for taking on the risk of decline. SIPC is not going to protect you from your account value going to zero because of bad investment choices, or buying stock in a company who goes bankrupt, or bad stock markets.Â
Where Can I Learn More About FDIC and SIPC?
Learn more about FDIC:
- Visit their website.
- Check out their online insurance estimator.
- Give them a call at 1-877-275-3342 (1-877-ASK-FDIC)
- Check out their news for consumers
Learn more about SIPC:
- Visit their website
- Check out their FAQ for investors
- Find out more about what they protect
- Learn how it works when you have multiple accounts
I’d Love To Know
Did you learn something new today? Let me know in the comments.
And please do share this with others you may have seen confused over the whole “FDIC vs. SIPC” insurance question.
Be sure to follow my blog for more great posts via e-mail or WordPress, or connect with me on Facebook or Twitter and say hello! You can also check out what I’m buying or baking on Instagram, what I’m pinning on Pinterest, or the latest books I’m reading (or want to read) over on Goodreads.
