Beyond FDIC insurance: How protected is your money outside of banks?

By Jeanne Sahadi, CNN

New York (CNN) — Just as stock market turmoil is a good reminder to make sure your investment portfolio is diversified, a few surprise bank failures is a good excuse to find out whether your financial accounts — not just your checking and savings accounts — are all protected in the event that an institution housing them fails.

Spoiler alert: You likely have at least some protection in all but your crypto accounts.

Here is a quick rundown on what protections exist for your accounts in a bank, credit union, brokerage, 401(k) plan, IRA and cryptocurrency exchange.

Bank accounts

Make sure the banks you use are insured by the Federal Deposit Insurance Corporation.

Should your FDIC-insured bank fail, that coverage will protect up to $250,000 per depositor for each account ownership category at that bank.

There are several types of deposit accounts you may have at one bank (e.g., individual savings account, joint checking, business account, etc.) and each would be covered separately. For example, if you own an account jointly, each owner is covered up to $250,000, so effectively you and your spouse will have $500,000 in coverage for that one account.

That would be in addition to coverage you would receive for any account in your name only. (Use this FDIC calculator to figure out your coverage, given the particulars of your situation.)

The FDIC also offers coverage for your certificates of deposit accounts and deposits such as cash or a CD made in connection with certain retirement accounts that are self-directed — meaning you decide how the money is invested. This may include some 401(k) plans, Keoughs and IRAs. For example, say you have two IRA accounts at your bank and both are invested CDs. If, combined, they are worth $300,000, you would be covered for $250,000 in total if your bank failed.

FDIC insurance will only cover deposits — not investments or valuables — in your account, which means stocks, bonds, crypto or the contents of your safe deposit box are not insured. “Investment products that are not deposits, such as mutual funds, annuities, life insurance policies and stocks and bonds, are not covered by FDIC deposit insurance,” the agency notes.

Credit union accounts

If you have money at a credit union, you should make sure that the entity is federally insured through the National Credit Union Administration.

NCUA, which is backed by the full faith and credit of the US government, covers accounts up to $250,000, in much the same way the FDIC covers bank accounts. And, as with FDIC coverage at banks, your credit union money may be insured for more than $250,000 if it is spread across different types of accounts that are eligible for coverage.

Brokerage accounts

If you have an account of stocks and bonds with a registered broker-dealer that is a member of the nonprofit Securities Investor Protection Corporation, you will receive up to $500,000 of protection, should that brokerage fail and a portion of your assets are still not recovered when the firm liquidates.

SIPC protection will cover anything defined as “securities” under the Securities Investor Protection Act, such as stocks, bonds, CDs, mutual funds and money market funds.

Up to $250,000 of your $500,000 coverage can be used to protect cash in your account associated with your securities — for example, if you just sold some stocks and put the proceeds in your account.

For answers to more specific SIPC questions, this is a very helpful FAQ.

On top of SIPC insurance, a brokerage may provide additional protection to its customers through private insurers.

Crypto accounts

If you invest in crypto assets you have no federally guaranteed protections should the company acting as custodian of your assets go under.

Even if you’re holding your crypto assets at a firm that is an SEC-registered broker-dealer and it is a member of SIPC, your crypto assets will not receive SIPC protection. The reason? “Crypto would have to be deemed a ‘security’ under the Securities Investor Protection Act. Crypto is not a security under SIPA,” said SIPC president and CEO Josephine Wang.

The Securities and Exchange Commission also spelled out in a recent investor alert the lack of protection for crypto investors.

The legal and regulatory environment — not to mention best practices for crypto businesses — remain in flux.

Generally speaking, “your protection lies solely in the contract with the exchange,” said law professor Pamela Foohey of Benjamin N. Cardozo School of Law. “And [those contracts] can be updated without notice.”

What’s more, there isn’t enough legal precedent to know how a bankruptcy court judge will interpret those contracts and your claim to the assets in question.

A judge may decide, for instance, that assets from your crypto account belong to the company (aka debtor), not you, and that you are an unsecured creditor, meaning you will be last in line to be paid back if the failed company has any money to pay out. That is essentially what a judge determined in an initial ruling in the bankruptcy case of cryptocurrency lender Celsius Networks.

And even if a court does decide the assets belong to you, not the company, the legal process to get your assets back could take years, Foohey noted.

401(k) plans

If your employer goes belly up, legally the vested money in your 401(k) cannot be treated as the company’s assets by a bankruptcy court. So the company’s creditors may not make a claim on them.

“[The Employee Retirement Income Security Act] protects 401(k) assets that have been deposited and are fully vested if the employer files bankruptcy,” said Hattie Greenan, spokesperson for the Plan Sponsor Council of America.

If, however, your employer failed in its duty to deposit any of your contributions or any of the company matches by the time of bankruptcy, that money may be lost to you.

If your employer had in place a defined-benefit pension plan and you are entitled to benefits, they are likely to be paid to you up to a cap by the Pension Benefit Guaranty Corporation, which insures employer pensions.

Payment apps

Should anything ever go wrong at the companies that provide payment apps you use, any cash you store in your accounts with them could be at risk.

Rohit Chopra, director of the Consumer Financial Protection Bureau, warned in a statement that payment services like PayPal, Venmo, Cash App and Apple Pay “are increasingly used as substitutes for a traditional bank or credit union account but lack the same protections to ensure that funds are safe.”

Some money held in certain types of payment app accounts — PayPal Savings, for example — are indeed deposited in FDIC-member banks and thus would be protected. But much of the funds are held by the services themselves, without federal insurance.

– CNN’s Chris Isidore contributed to this report

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