Certain financial terms look like an alphabet soup of letters (and sometimes numbers). However, it’s worth knowing the definitions of and understanding SIPC insurance vs .
SIPC stands for “Securities Investor Protection Corporation” and FDIC stands for “Federal Deposit Insurance Corporation.”
The SIPC insures against an investor’s (your) cash and securities losses if your brokerage firm fails and is a SIPC member. The FDIC insures against a depositor’s (your) deposits losses if your bank or savings association fails and is a FDIC member.
We’ll take a look at SIPC vs. FDIC to help you understand how each works, whether your account is insured, and why you need one or the other. Take a look at the chart below for a quick overview.
|What it covers||Securities and cash held by member brokerage firm||Funds in deposit accounts at member bank/savings association|
|Coverage limit||$500,000 total coverage for securities held/uninvested cash held; limit of $250,000 for cash||$250,000 per depositor, per insured bank, for each account ownership category|
|When it applies||When a SIPC member brokerage firm fails||When a FDIC member bank fails|
|How it works||Lost securities and cash can be claimed and restored up to the SIPC coverage limit per investment account type, per covered brokerage firm.||Lost deposits can be claimed and restored up to the FDIC coverage limit per deposit account type, per covered bank.|
What is SIPC insurance?
The SIPC, which was created as part of the Securities Investor Protection Act of 1970, is a nonprofit corporation that protects investors against losses if their brokerage firm fails. In short, you’re protected if you have money in an account with a firm and it goes under. However, not every brokerage is a SIPC member. It’s important that you choose a brokerage that is a member — just in case the worst were to happen. It’s a good idea to do your due diligence when choosing a brokerage for investment purposes.
What does it cover?
The SIPC protects investors against the loss of cash and securities like stocks and bonds, Treasury securities, certificates of deposit (CDs), mutual funds, money market mutual funds and other securities. However, it’s important to note that the SIPC does not protect the following:
- Commodity futures contracts unless held in a special portfolio margining account
- Foreign exchange trades
- Investment contracts (such as limited partnerships)
- Fixed annuity contracts not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933
What happens if you receive poor investment advice? Does the SIPC protect you? The answer is no. If your securities drop in value, the SIPC does not protect you, nor does it protect you if you’re sold worthless stocks and other securities. Its sole focus is restoring investor cash and securities as swiftly as possible after a member brokerage fails.
While SIPC was created through an act of Congress, it’s not a government agency or organization. Because of this, it has no authority to investigate fraud or regulate shady broker dealings and poor investment advice. (The Financial Industry Regulatory Authority, or FINRA, a not-for-profit organization, regulates this kind of behavior.) Plus, SIPC doesn’t cover stock market losses or other costs associated with normal investing risk.
SIPC coverage amount
The SIPC insures each customer of SIPC member firms up to $500,000 in total coverage (limit of $250,000 for cash) per customer for claims for lost securities and cash held by the SIPC member firm on behalf of the customer.
How many investors have received help with SIPC coverage? From its inception in 1970 through December 2020, the SIPC put forth $3.1 billion to recover $141.8 billion in assets for an estimated 773,000 investors.
What is FDIC insurance?
The FDIC, which was created in 1933, is an independent agency of the United States government that provides insurance for your bank deposits in the event that your FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government.
If your bank isn’t a member of the FDIC, it could be bad news. It means that if the institution files for bankruptcy, closes, or suffers another type of financial hardship, your money isn’t insured. While most banks are FDIC insured, not all are. Know whether your financial institution is FDIC insured before you choose where to store your money.
What does it cover?
Deposit products insured by the FDIC include the following:
- Checking accounts
- Savings accounts
- Money market deposit accounts
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.
FDIC coverage amount
The amount of FDIC insurance coverage you may be able to get depends on how you hold your funds, which can be in single accounts, certain retirement accounts, employee benefit plan accounts, joint accounts, trust accounts and business accounts as well as government accounts.
The standard insurance amount is $250,000 in deposits, which includes principal and accrued interest. Learn more about how to maximize FDIC coverage.
How to know if your account is insured?
Now that you know the difference between FDIC and SIPC, it’s important to find out whether your bank(s) and brokerage(s) are members of their respective organizations.
Ally Bank is FDIC insured. If your current financial institution isn’t insured, browse our banking opportunities to see if our offerings align with your financial goals.
Investors, take note: Ally Invest is a member of the SIPC, so you can take that into consideration when selecting a brokerage.
SIPC vs. FDIC: Why you need them
FDIC vs SIPC: Neither is “better” than the other, and in fact, you need both depending on the types of accounts you have.
Most banks and brokerages are covered, but it doesn’t hurt to double check. Both the FDIC and SIPC offer searchable databases of their members, so double check that you’re currently banking and investing with insured institutions.