More Protection Slated for Retirement Funds
Thanks to a federal budget bill signed into law this month, using bank accounts to store large sums for retirement may become a more attractive option.
The legislation contains long-sought reforms to federal deposit insurance, which covers as much as $100,000 per depositor. The biggest change: Starting no later than November, depositors will get as much as $250,000 in insurance coverage for retirement accounts. The amount covered in other accounts will stay at $100,000.
Deposit insurance is needed mainly in the event of a bank failure. In those rare cases, the Federal Deposit Insurance Corp. swoops in and writes checks to every depositor up to the coverage limits. When deposits exceed those limits, any amount over the threshold can be lost.
“We have had some failures in the past where people have had considerable amounts of money in individual retirement accounts,” said David Barr, an FDIC spokesman. “They’ve suffered significant losses. But that coverage will go up to $250,000 per person when we change this rule.”
The law also would allow the coverage limits for other types of deposit accounts to increase in $10,000 increments starting in 2010, depending on inflation.
Bankers have been lobbying for higher deposit insurance limits for years. They argue that because these limits have not changed since 1980, inflation has robbed depositors of much of their insurance coverage.
Hiking the limits is particularly important as baby boomers edge closer to retirement, said James Chessen, chief economist for the American Bankers Assn. As people’s work lives draw to a close, they often want larger proportions of their assets in safe, liquid investments.
“This additional insurance makes so much sense for today’s consumers,” said John Stephan, senior vice president of Union Bank of California.
Even before the new rules take effect, depositors can potentially hold millions of dollars in one bank and have it all fully insured by the federal government -- if they are careful and set up their accounts correctly. It’s simply a matter of knowing the rules, the FDIC’s Barr said.
Here are five things to keep in mind:
* Different types of accounts are insured separately. Individual accounts, joint accounts, trust accounts -- those labeled “payable on death” to specific beneficiaries -- and retirement accounts all warrant separate coverage.
For a trust account, the owner is entitled to $100,000 of coverage per beneficiary. For a joint account, each co-owner is entitled to $100,000 of coverage.
Consider this hypothetical example. Jane Smith deposits $100,000 in her own name. She also opens a joint-ownership account with her husband for $200,000. Then she sets up a $300,000 account that will go to her three siblings -- $100,000 each -- when she dies. And she sets up a $400,000 account that is payable on death to her four children. Finally, she has a $100,000 IRA in her own name.
The entire $1.1 million held in Jane’s accounts is fully insured by the FDIC.
When the new rules go into effect later this year, she could boost her IRA assets to $250,000 and have $1.25 million fully insured.
* The accounts have to be truly separate, not in name only. If you set up a joint account, for instance, the owners must have equal access to it for the separate insurance to be valid.
If one owner can get cash from the account without restriction but the other can’t, the FDIC would consider the account to be owned by the person with unfettered access.
If Jane set up her joint account with her daughter, but said she could get money from the account only with Jane’s sign-off, for example, the account would be considered Jane’s alone. The balance in that account would be added to her other individual balances, and any amount over $100,000 would not be insured.
* Be careful with beneficiary designations. Accounts that are payable on death qualify for separate insurance coverage only if the beneficiary is a child, grandchild, parent, sibling or spouse of the account owner.
If Jane made the mistake of naming a niece, nephew, in-law or cousin as the beneficiary of any of those accounts, the money earmarked for that nonqualified beneficiary would be aggregated with Jane’s individual deposits to determine how much insurance coverage she had. Any amount above $100,000 would be at risk.
In addition, the beneficiary must have a complete right to the cash, without condition, at Jane’s death.
* Use just one joint account. Some depositors mistakenly assume that they can get vast amounts of FDIC coverage by creating numerous joint accounts. However, the interest of each individual owner in a joint account is aggregated with that owner’s share of all other joint accounts to determine insurance coverage.
In other words, if Jane sets up a joint account with each of her children and siblings, the amount of insurance coverage on her accounts would plummet. She still would have $100,000 in coverage for her individual account, $100,000 for her retirement account and $100,000 for her first joint account. But the additional $700,000 in joint accounts with her kids and siblings would not be covered.
Also, even though a retirement account gets separate FDIC coverage, all individually held retirement accounts are lumped together. Consequently, a person with a traditional IRA, a Keogh account and a Roth IRA would have to add all of those accounts to determine how much was covered. If $100,000 was deposited in each of those accounts, $200,000 of this individual’s retirement money would be at risk.
* When in doubt, inquire. If you’re not sure whether you’ve labeled accounts correctly, call the FDIC at 877-ASK-FDIC or check out the electronic deposit insurance estimator and fact sheets on the agency’s website at www.fdic.gov.
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Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail her at kathy.kristof@latimes.com. For previous columns, visit latimes.com/kristof.
