Amid the bank failures taking place in 2023, this article will be a deep dive into the protections you have as a depositor when making deposits of your hard earned cash an FDIC-insured financial institution. The FDIC regulation changes set to take place in 2024 will also be outlined. FDIC insurance protects depositors against the loss of their insured deposits if an FDIC-insured financial institution fails. It's important to understand how FDIC insurance works and what the coverage amounts are for different types of accounts. Let's dive in.

FDIC Coverage Basics

The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government that was created in 1933 in response to the Great Depression. The FDIC insures deposits of up to $250,000 per depositor, per insured financial institution, for each account ownership category. This means that if a bank or savings institution fails, the FDIC will reimburse depositors up to $250,000 per account type at any given insured financial institution. Types of deposits include:

· Checking Accounts

· Savings Accounts

· Money Market Accounts

· Certificates of Deposit

There are four major categories of ownership that qualify for this coverage:

· Individual Accounts

· Joint Accounts

· Trust Accounts

· Retirement Accounts

Individual Accounts vs Joint Accounts

When it comes to individual accounts vs joint accounts with the same bank or savings institution, both account types are eligible for up to $250,000 in coverage from the FDIC. For example, if you have a joint checking account with your spouse that has a balance of $500,000 at an insured financial institution and then you each open an individual savings account with another $250,000 balance at that same bank or savings institution—you will be covered up to $1,000,000 total by the FDIC even though all accounts are held at one insured financial institution under your names. This is due to the difference of ownership categories being recognized by FDIC. I addition to the deposits listed above, if you add a $500,000 deposit, jointly owned with a third party, that deposit would not receive an additional $250,000 FDIC coverage, because you have already reached the maximum $250,000 FDIC coverage in the category of joint ownership.

Revocable and Irrevocable Trust Accounts Based on Beneficiaries

If you have a trust account based on beneficiaries, each beneficiary can receive up to $250,000 in coverage from the FDIC. For example, if you have a trust fund with four beneficiaries who are each entitled to one-fourth of the fund’s balance at any given time, then each beneficiary would be eligible for $250,000 in coverage from the FDIC—for a total of $1 million in coverage for the entire trust fund. In this case, each beneficiary must be named individually in the trust documents and the account registration must reflect the name of the trust. Grantor retained interest irrevocable trusts are FDIC insured based on the number of living grantors until all grantors pass. FDIC insurance will be based on the number of listed beneficiaries once the grantors pass and no longer control the trust.

Retirement Accounts

FDIC coverage extends to traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP IRAs, Self-directed 401(k)s, profit-sharing plans, self-directed Keogh plans and section 457 deferred compensation plans.

What Happens When a Bank Fails?

When a bank fails or goes bankrupt due to bad loans, mismanagement or other financial issues, it’s possible for customers to lose their funds if they do not have proper FDIC coverage. Fortunately, the FDIC steps in quickly and generally within 24 hours after receiving notification from the failed bank’s primary regulator. Any funds covered by the corporation are transferred directly into another insured depository institution that is approved by the FDIC. In most cases, customers will not even notice any interruption in service when their funds are transferred over as long as they use their same checking numbers and routing information at their new institution.

How Do I Claim FDIC Insurance After a Bank Fails?

If your bank fails due to insolvency or bankruptcy and you have funds protected by FDIC insurance at that institution, all you need to do is contact your new bank – usually within 30 days – with proof of deposit from your former institution along with documentation proving who owned those funds before they were transferred over. Generally speaking, claims must be filed within 90 days of a failed institution closing down but this timeline can vary depending on state laws where the institution was based out of. Once all required documentation has been submitted, customers should receive their reimbursement checks within 10 business days after filing with the FDIC insured depository institution transfer form (IDT).

Changes Coming in 2024 to FDIC Coverage

Aa a CERTIFIED FINANCIAL PLANNER™, investment advisor, and CEO of Provident Financial Planning, it is important for me to stay informed on any changes that may affect my clients. One such change is coming in 2024 to the FDIC program.  

FDIC insurance helps protect depositors from losing their money when an insured financial institution fails or goes bankrupt due to mismanagement or insolvency. There are several categories of ownership that qualify for up to $250k worth of coverage per person but it is important to understand how much coverage each type carries so that you can plan accordingly when investing your money into savings accounts or other retirement plans like IRAs and 401(k)s. Knowing what happens when a bank fails and how you can claim back any lost funds through filing with the IDT form within 90 days helps ensure that your money remains safe no matter what happens down the road with any particular financial institution. It’s always best practice to speak with a certified financial planner or investment advisor prior to making any major decisions regarding investments so be sure to consult one today!

Make an appointment for a free consultation to speak with the Provident Financial Planning team of Certified Financial Planner™ and JD/CPA tax experts, so we can advise you on how to implement an wealth, investment, tax, and legacy strategy that is tailored to you.