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FDIC vs SIPC—What’s the difference?

FDIC. SIPC. NCUA. There’s a good chance you’ve heard of most of these acronyms at some point while dealing with your finances. But what exactly does each mean when it comes to your money?

Articles by katiemarie

By Katie Marie
Content Manager, Betterment  |  Published: November 21, 2019

It’s important to be aware of how your financial assets are insured and how coverage limits may affect you.

The FDIC and NCUA insure cash that’s held in banking products, up to a certain amount.

SIPC, on the other hand, aims to protect up to a certain amount of losses if your brokerage firm fails.

Take a moment to think about all the different types of insurance you currently have. You may have insurance for your car, renter’s insurance for your apartment, and life insurance for, well, yourself. These days, some of us might even have pet insurance, or better yet—wait for it—alien abduction insurance. Just like other aspects of your life, your money may be insured, or otherwise protected, as well.

At a high level, you can think of FDIC and NCUA as providing insurance for banking products, and SIPC as providing protection for funds held in a brokerage account in the event that the brokerage fails. FDIC and NCUA generally cover bank deposits up to $250,000 per account holder, per bank, per ownership category. SIPC generally covers assets worth up to $500,000, with a $250,000 limit on cash holdings, and the coverage applies per each account of a separate capacity. It is important to note that there are risks associated with owning securities, and SIPC does not protect against a loss in the market value of your brokerage account.

Part of having a solid financial plan is knowing whether or not your financial assets are insured—whether they’re in cash or investments—and how coverage limits may affect your accounts. Please note that Betterment is not a bank.

FDIC: Federal Deposit Insurance Corporation

The Federal Deposit Insurance Corporation (FDIC) was created in 1933. Does that date ring a bell? In the mid-1930’s, the Great Depression was in full swing. The public needed a reason to trust banks again, especially after seeing hundreds of banks fail in the span of just a few years.

The FDIC monitors its member banks, oversees the process of winding down banks if they fail, and insures deposits at member banks. You can easily tell if your bank is a member of FDIC by reviewing your bank’s website, looking for signs in your bank’s local branch, or by searching the FDIC’s website.

Accounts Covered: Types of accounts covered by FDIC insurance include checking accounts, savings accounts, savings account alternatives, money market deposit accounts (MMDAs), certificates of deposit (CDs), cashier’s checks, and money orders.

Coverage Limits: The FDIC generally insures deposits up to $250,000 per depositor, per banking institution, for each account ownership category.

We’ve previously written more in-depth about FDIC insurance here.

NCUA: National Credit Union Administration

Products provided by credit unions are typically referred to in terms of shares because credit union members are buying shares of credit union ownership when they make their deposits. Even though credit unions are owned by their members, rest assured that they are still regulated.

The National Credit Union Administration (NCUA) was created by the U.S. Congress in 1970, and its purpose is relatively self-explanatory. It oversees credit unions and insures the shares that consumers purchase. You can determine a credit union’s NCUA membership by checking its website, seeing if there is a sign at a physical branch, or by searching the NCUA’s website.

Accounts Covered: Types of accounts insured by NCUA insurance include regular shares (similar to savings accounts), share drafts (similar to checking accounts), money market accounts, and share certificates (similar to CDs).

Coverage Limits: The NCUA generally insures deposits up to $250,000 per depositor, per credit union, for each account ownership category.

SIPC: Securities Investor Protection Corporation

The Securities Investor Protection Corporation (SIPC) was born when the Securities Investor Protection Act was signed into law in 1970. Its purpose is to protect consumers from the loss of cash and securities held at brokerage firms that go bankrupt.

It’s important to distinguish that “loss” in this context doesn’t include a loss due to the market going down. Markets go up and down, and that’s just a fact of investing. Investments can lose value—we all know that. “Loss” in the context of SIPC insurance refers to missing assets or an investment that becomes unaccounted for when a brokerage fails.

Think of the classic ponzi scheme where a broker accepts funds to invest, except instead of investing the funds, the broker turns around and pays previous investors so that they believe they are receiving investment returns. A simpler example would be a brokerage firm that improperly commingles operating funds with customer funds and then goes bankrupt.

You can determine if a brokerage firm is a SIPC member by checking its website, looking for a sign at the brokerage’s physical branch, or by searching the SIPC’s website.

Accounts Covered: Types of accounts and investments generally protected by SIPC include stocks, bonds, mutual funds, money market mutual funds (MMMFs), certificates of deposit (CDs), annuities, government securities, municipal securities, and U.S. Treasury securities (Treasuries).

Coverage Limits: SIPC generally covers assets worth up to $500,000, with a $250,000 limit on cash holdings. These limits apply to each account of a separate capacity. Click here to read more about how an account capacity is determined and what some examples might look like.

Because of these limits, you might think that you shouldn’t hold more than $500,000 in a single brokerage account, but remember that SIPC coverage applies to the assets that are ultimately missing, which may not be reflective of the entire account balance.

Chances are good that you’ll never end up needing the coverage at all, because fewer than 1% of SIPC-member brokerages were ever subject to SIPC proceedings. Of the claims that were investigated, 99.9% of them resulted in investors being made whole. You can read more about these figures and learn more about SIPC insurance here.

Conclusion

The financial system in the U.S. is primarily built on trust. The availability of various types of financial insurance and protection helps to assure customers that they can trust the institutions they are placing their hard-earned money with.

I can assure you that it is safer to keep your money in a reopened bank than under the mattress.

President Franklin Roosevelt, 1933

Part of any comprehensive financial plan includes examining how each of your accounts are insured or protected, and being aware of any coverage limits that might affect you. If you have questions or concerns about your financial plan, consider speaking with one of our financial advisors. Click here to learn more about how our advisors can help you with your financial plan.

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Contributing Authors

Josh Rubin
Director of Legal, Betterment

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