Navigating and truly understanding the world of finance can be challenging.
Aside from deciding where to put your money, there’s the added puzzle of trying to decode what all those darn acronyms mean. From IRA and ETF to APR versus APY and the NYSE (if you’re not familiar, that’s the New York Stock Exchange), it’s easy to imagine even Alexa and Siri getting annoyed by your constant questions.
To give your virtual assistant a break, let us explain the difference between two important acronyms that everyone with money should understand: FDIC and SIPC.
FDIC and SIPC are both a type of insurance that offers protection for your money … but that’s where the similarities end and the explaining begins.
Alexa, what is FDIC?
The Federal Deposit Insurance Corporation (FDIC) was created in 1933 with a number of goals, the most notable being insurance for your bank deposits. In order for your money to qualify for FDIC insurance, the funds must be in an FDIC-insured bank account, like Ally Bank.
If your bank isn’t a member of the FDIC, it could be bad news: If the institution files for bankruptcy, closes, or suffers another type of financial hardship, your money isn’t insured. While many banks are FDIC insured, not all are. Knowing whether a bank is FDIC insured is an important step when choosing where to store your money.
FDIC-insured accounts are covered for at least $250,000 in deposits, including principal and accrued interest.
The insurance covers all deposit accounts, including:
- Interest Checking Accounts
- Online Savings Accounts
- Certificates of Deposit
- Money Market Accounts
How to maximize your FDIC insurance
Although each deposit account’s FDIC protection is limited to $250,000, there are ways to further maximize the coverage. (Click here to calculate your FDIC insurance coverage.) For example:
- Open single-name accounts: If you, your spouse, and your college-age child each open an account that’s insured for up to $250,000 in your name, your total coverage will equal $750,000.
- Pool money into joint accounts: In addition to your individual accounts, also open a joint account to receive another $250,000 in insurance.
- Open a custodial account in a child’s name: If permitted in your state, the Uniform Gift to Minors Act (or Uniform Transfer to Minors Act) insures such accounts as a single-name account — not in the name of the parent or guardian.
- Open a Trust: Revocable Trusts allow coverage for beneficiaries, so you could name multiple beneficiaries — each of whom would have accounts insured for up to $250,000.
Alexa, what is SIPC?
The Securities Investor Protection Corporation (SIPC) is a non-profit corporation that protects investors against losses if their brokerage fails. It was created as part of the Securities Investor Protection Act of 1970, which was meant to promote confidence in the U.S. securities markets after a near collapse of the financial markets.
If your money is invested with a SIPC member brokerage that files for bankruptcy or faces other financial troubles, you’re protected for up to $500,000 in securities (stocks, bonds, etc.) and cash — with a $250,000 limit for cash. This covers money or assets in brokerage accounts or retirement accounts like IRAs and 401(k)s. In addition to SIPC insurance, some financial institutions like Ally Invest provide additional insurance protection backed by third-party underwriters.
But as with banks and the FDIC, not every brokerage is a SIPC member, so do your due diligence when choosing a brokerage to invest with.
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. Its sole focus is restoring investor cash and securities as swiftly as possible after a member brokerage fails.
How do you know you’re insured?
Now that you know the difference between the FDIC and SIPC, the most important thing is to find out whether your bank(s) and brokerage(s) are members of their respective organization.
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.
Ally Bank customers needn’t worry: Ally Bank is FDIC insured. If your current financial institution isn’t insured, browse our banking options to see if our offerings align with your financial goals.
And investors, take note: Ally Invest is a member of the SIPC, so you can take that into consideration when selecting a brokerage.