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What Is the FDIC & How Does It Work?

May 11, 2020 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Is the FDIC & How Does It Work?

When you open a savings or checking account, you may see a notice stating the account is FDIC-insured.

But what exactly is the FDIC? And, what does this insurance do for you?

The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the U.S. government that protects and reimburses your deposits up to $250,000 in the event your bank fails.

While people tend to take that guarantee for granted now, there’s a lot of history behind this agency—and, as banking evolves, it can be important to know what FDIC insurance does and doesn’t keep safe.

Read on to learn what the FDIC is, what it does, and why it may be important to you.

A Brief History of the FDIC

You might have learned a little about the FDIC back in high school when you studied the Great Depression. After thousands of banks failed, the FDIC was created in 1933 to boost confidence in the U.S. financial system.

In January 1934, the FDIC began insuring deposits, covering them up to $2,500. That number has increased through the years, of course, most recently with the Emergency Economic Stabilization Act of 2008.

President George W. Bush signed the act to temporarily raise FDIC insurance coverage from $100,000 to $250,000 per depositor during the financial crisis. President Barack Obama made the coverage hike permanent in 2010 with the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act .

Okay, enough of the history lesson—what you might want to know is what all that means for you today.

Well, for one thing, since its creation, no depositor has lost any money from an FDIC-insured deposit.

This means that, unlike your great-grandparents, you can put your money into an eligible financial institution and know it’s more secure than stuffing it under your mattress. (Yes, that used to be a thing for many savers.)

Also of note: Though it’s the customers’ money that’s covered by the FDIC, the agency is funded by premiums paid by the banks and from earnings on investments in U.S. Treasury securities.

There are rules and limits you should know about, however, if you want to make the most of the FDIC’s coverage.

Not Every Financial Institution Is Covered by the FDIC

The FDIC insures deposits in most banks and savings associations, but not all of them. Every FDIC-insured depository institution must display an official sign at each teller window or teller station, so that’s an easy way to check.

Or you can find out if your deposits are insured by using the FDIC BankFind tool .

If you’re using an online bank or a mobile-first financial product, the company’s website should contain information about its coverage.

The National Credit Union Administration (NCUA), created by Congress in 1970, covers federally insured credit unions in much the same way as the FDIC, including deposits up to $250,000.

Accounts Eligible For FDIC Insurance

The FDIC insures all deposit accounts at insured banks and savings associations, including checking, savings, money market accounts, and certificates of deposit (CDs) up to the FDIC’s limits.

Certain retirement savings accounts may qualify for insurance, as well, but only when placed in certain types of investments and in accordance with all FDIC requirements.

Deposit accounts, such as checking and savings accounts, money market deposit accounts, and certificates of deposit, can all be held in traditional IRAs and Roth IRAs and are eligible for FDIC insurance.

Money invested in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities isn’t insured—even if you purchased those products from an insured financial institution.

Recommended: Comparing the Different Types of Deposit Accounts

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How To Recover Your Money If A Bank Fails

When a bank fails, the FDIC has two jobs: First, it pays depositors up to their insurance limit.

Second, as the receiver of the failed bank, it collects and sells the assets of that institution and settles its debts, including claims for deposits in excess of the insured limit.

Because of the FDIC safety net, you won’t likely see fearful customers lining up to get their money the way they did before deposit insurance was established.

Still, when a bank closes, it affects depositors, creditors, and borrowers—and naturally there are questions about automatic deposits and payments, earned interest, outstanding checks, and more.

The FDIC states that it will post information as promptly as possible, or you can contact the agency at 877-ASK-FDIC.

FDIC Coverage Has Limits

Given the aforementioned $250,000 cap, FDIC insurance is clearly not unlimited.

As a result, you may want to keep in mind that by having money in excess of that amount in one bank or one account, you may be putting yourself at risk.

Because the $250,000 applies to each bank where you have an account, one way you may be able to increase the FDIC insurance coverage available to you is by using multiple banks.

Another option is to structure your accounts properly within a single bank. If you have any concerns about your coverage, it can be a good idea to discuss them with a representative at your bank.

The Takeaway

Though it’s not very common, a bank can fail when it takes on too much risk. When this happens, it puts all of the bank’s customers’ assets in jeopardy.

But if your bank is covered by FDIC insurance, you can receive reimbursement up to $250,000 so your funds aren’t lost for good.

FDIC insurance covers checking, savings, money market accounts, CDs, and other deposit accounts.

The FDIC does not cover some of the other financial products or services offered by banks, including stocks, bonds, mutual funds, annuities, and securities.

Putting your money in a brick-and-mortar financial institution isn’t the only way to make sure it’s protected.

SoFi Checking and Savings® is a mobile-first online bank account that keeps your hard-earned dollars safe by partnering with FDIC-insured banks. Plus, members pay no account fees.

Check out everything SoFi Checking and Savings has to offer today.

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