FDIC Insurance for CDs

fred495

Here is, I am sure, a stupid question, but I need some reassurance.
I have a TOD and an IRA account at a brokerage firm. Before CD rates decrease, I plan to purchase several CDs in both accounts from different banks.
Does the FDIC insurance maximum of $250,000 apply to the CD's of each bank, or to the TOD and/or IRA brokerage account?
In other words, can I have, for example, three CDs of $250,000 each in three different banks in my IRA brokerage account, and two CD's in my TOD account also of $250,000 each in other non-overlapping banks, and be fully FDIC insured for a total of $1,250,000?
Your reply is much appreciated.

yogibearbull

The FDIC coverage is for all personal assets held at a bank with the new max $1.25 million considering various tricks. The FDIC coverage kicks in when the bank fails.
For cash and securities held at brokerage, the SIPC insurance limits would apply. The SIPC kicks in when the brokerage fails.

fred495

yogibearbull said:

The FDIC coverage is for all personal assets held at a bank with the new max $1.25 million considering various tricks. The FDIC coverage kicks in when the bank fails.
For cash and securities held at brokerage, the SIPC insurance limits would apply. The SIPC kicks in when the brokerage fails.

Thanks for your reply, yogi.
However, I am confused when you say that: "The FDIC coverage is for all personal assets held at a bank with the new max $1.25 million considering various tricks."
Based on my example, which "various tricks" are you referring to? How should I modify my plan to avoid using any "tricks"?
Thanks.

yogibearbull

You can have brokered CD from a bank, and then at bank itself, you can have personal a/c, joint a/c, IRA a/c, multiple POD/TOD CDs. Under the current system, all that can add up to a lot at the same bank. But the new FDIC limit will be $1.25 million for all assets associated with a person.

Since you are planning to buy brokered CDs from DIFFERENT banks, you are well covered just by the $250K FDIC limit per bank.

As I read your OP, you shouldn't be concerned. But don't fish for bad banks thinking that FDIC will protect you. In a way, it will if the bank fails, but your CDs may be reissued at lower rates.

fred495

Thanks, yogi.
I always appreciate your thorough and very helpful replies.
Much appreciated.

Old_Joe

@fred495 - to reinforce yogi, the trick here is to buy brokered CDs through your brokerage, and spread them around through different banks. Maybe 50k here, 50k there. I try to look for banks that are more or less main-line. But be careful on "callable"- Morgan Chase has good rates but their stuff is mostly callable before maturity.

Also consider Treasury bonds- I use Schwab, and at the moment Treasury maturity rates in the secondary markets are pretty close to CD rates. My ladder goes out to early 2028, with a mix of CDs and Treasuries.

fred495

Old_Joe said:

@fred495 - to reinforce yogi, the trick here is to buy brokered CDs through your brokerage, and spread them around through different banks. Maybe 50k here, 50k there.

However, my plan is to buy five CDs through my brokerage firm in my TOD and in my IRA accounts at $250K each, for a maximum of $1.25 million. Of course, I will spread the CDs around at five different banks.

Do see a problem with that in terms of being fully covered by FDIC insurance?

Old_Joe

No sir, your FDIC coverage should be fine. It's just that I prefer to spread my income generation a bit more than that. Again, think about Treasuries... similar income, no FDIC issues at all and the Treasury ain't going out of business.

msf

The FDIC coverage is for all personal assets held at a bank with the new max $1.25 million considering various tricks.

That's the bank limit for all trusts only. Each ownership category still gets its own $250K per owner, except trust coverage is calculated per owner per beneficiary. (A trust with two owners and 5 beneficiaries gets coverage of $250K x $2 owners x 5 beneficiaries = $2.5M.)

A POD account is considered a trust account and an IRA is considered a "certain retirement account" - two different ownership categories. So the former is covered up to $250K/beneficiary and the latter gets its own $250K limit.

The rule change is that the coverage on trust accounts is limited to $250K/beneficiary per trust owner, but now only up to 5 beneficiaries, i.e. up to $1.25M if you name five or more beneficiaries. It used to be that if you named six beneficiaries, you'd get 6 x $250K = $1.5M coverage.

(There is a second rule change that combines revocable trusts and irrevocable trusts into a single ownership category.)

So if you have
- $1.8M in a POD with 6 beneficiaries and
- $300K in an IRA (retirement account) at the same bank

you used to get $1.5M coverage for the POD (6 x $250K) and $250K coverage for the IRA.

Now, you get $1.25M coverage for the POD and $250K coverage for the IRA. The remaining $550K in the POD and the remaining $50K in the IRA are uninsured.

You can check this with the FDIC calculator. https://edie.fdic.gov/calculator.html

For a complete description, see:
https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/index.html

fred495

yogibearbull said:

You can have brokered CD from a bank, and then at bank itself, you can have personal a/c, joint a/c, IRA a/c, multiple POD/TOD CDs. Under the current system, all that can add up to a lot at the same bank. But the new FDIC limit will be $1.25 million for all assets associated with a person.

Sorry, yogi, to bother you again, but I am having a bit of a problem finding five highly rated national banks at my brokerage for my five $250K CDs with FDIC insurance.

Reading your above statement, it seems that if I opened a $250K CD in my TOD brokerage account, and another 250K CD in my brokerage IRA account, they would both be FDIC insured even though they are purchased from the same bank.

Am I reading/understanding this correctly?

Thanks, again, for your help. Much appreciated.

yogibearbull

@fred495, because your CDs will be in different ownership categories (taxable Brokerage TOD & Brokerage IRA), they would each be covered for $250K even when at the same bank.

You may also try using the FDIC calculator that @msf linked (it requires too much info for generic use),
https://edie.fdic.gov/calculator.html

BTW, most major brokerage have the FDIC coverage at the brokered CD level, but some small brokerages may have an aggregate brokerage level FDIC coverage. Double-check this.

msf

The CD in the TOD account could be covered for even more if you've got multiple beneficiaries on the account. As I described above, that CD gets $250K coverage for each beneficiary, up to a max of 5 ($1.25M). That's in addition to the $250K for the IRA as yogi described.

Here's the relevant section from Fidelity's CD Disclosure Statement:

Trust Accounts. Effective April 1, 2024, deposits ... are insured for up to $250,000 per eligible beneficiary, multiplied by the number of beneficiaries, up to a maximum of 5 eligible beneficiaries:

• Informal revocable trusts .... These trusts may be referred to as a “Totten trust” account, “payable upon death” account, or “transfer on death” account. ...

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/fixed-income/cddisclosure.pdf

fred495

Thank you, yogi and msf, for the clarification. Much appreciated.