Why Keeping More Than $250,000 in One Bank Account Could Put Your Money at Risk
Savers who have built up large cash balances may be hesitant to invest it all in the stock market, since doing so can come with risks.
But these savers may face another type of risk, especially if they have more than $250,000 saved with a single institution.
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How the $250,000 insurance limit works
Federal Deposit Insurance Corporation (FDIC) insurance protects up to $250,000 per depositor, per insured bank for each account ownership category. If you bank with an insured bank, your first $250,000 are protected in case the institution goes under. The National Credit Union Administration (NCUA) offers similar insurance at credit unions. However, if your balance exceeds $250,000, it isn’t fully protected anymore.
A saver with a $100,000 checking account and a $200,000 savings account at the same bank may have $50,000 uninsured. That’s fine if the bank stays in business, but that uninsured money can vanish if the bank goes out of business. Having multiple checking, savings, certificates of deposit (CD), and money market accounts at the same insured bank won’t solve the problem since they are typically lumped together for FDIC insurance purposes.
The FDIC only covers deposit products. Any stocks, bonds, cryptocurrencies or annuities won’t be covered by FDIC or NCUA insurance.
Why uninsured deposits can become a problem
Bank failures are rare, with only two bank failures reported last year, according to the FDIC. However, bank failures can spike during economic distress, with 2009 and 2010 both seeing more than 100 bank failures.
Even though bank failures are statistically rare, why take that type of gamble for a problem that is easy to fix? If you have more than $250,000 with the same bank, you can open an account with a different financial institution and move some of the money over.
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Ways to protect more of your cash
Spreading money across FDIC-insured banks or NCUA-insured credit unions is an easy way to protect your money, while incorporating different account ownership categories can also help. Joint accounts, trust accounts and certain retirement accounts are also viable options if they make sense for your financial and legal situation.
Some banks make it easy by offering cash-sweep programs that spread deposits among partner banks. (Though it’s never a bad idea to contact the institution and make sure all your money is protected.)
Keeping too much cash
Having more than $250,000 in your bank account may also not make sense in terms of long-term savings. Investing in the stock market offers much higher potential returns than keeping your money in a savings or checking account, or similar alternatives like CDs.
Financial advisors tend to recommend keeping at least enough cash in a liquid account to cover three to six months of living expenses. While you may want to keep more on hand depending on your goals, risk tolerance and time horizon, you may want to consider investing some of your money.