FDIC vs SIPC: What's the difference?

Your relationship with your bank or brokerage firm ideally is built on trust. You've leaned on these institutions to protect your money and reach growth milestones on your financial path.

But if these banks or other financial institutions fail, what happens to your money? That's where FDIC and SIPC insurance coverage come in, offering different types of protection for your money if and when these rare events happen.

Let's break down the features of SIPC vs. FDIC and explore how each can offer its own form of reassurance.

The Federal Deposit Insurance Corporation (FDIC) provides insurance protection on your covered deposits at FDIC-member banks. It protects your account balances and certificate holdings in the event your bank fails and is unable to return your money. It mainly covers:

• Checking accounts
• Savings accounts
• Money market deposit accounts
• Certificates of deposit (CDs)
• Cashier's checks
• Money orders
• Negotiable order of withdrawal (NOW) accounts

Although the FDIC is a government agency, tax dollars do not fund it. Instead, institutions pay for this insurance through premiums. The FDIC has made depositors completely whole on their insured balances in every bank failure since it was formed in 1934.

The FDIC coverage limit is $250,000. This means if your FDIC-insured institution is unable to meet its obligations, the FDIC will return your money, dollar for dollar, up to that amount. That's not a total-per-person amount; it's up to $250,000 for each depositor, per account ownership category, at each member bank. So your total limit may be higher.

Common ownership categories include these accounts, among others:

• Single accounts
• Joint accounts
• Certain retirement accounts
• Revocable and irrevocable trust accounts
• Government accounts

For example, if you have $250,000 in an account at one bank and $250,000 in an account at another bank, both are fully insured. If both banks were to fail, the FDIC would ensure you received $500,000.

The Securities Investor Protection Corporation (SIPC) protects cash and other securities held in brokerage accounts at SIPC member firms. The SIPC covers:

• Stocks
• Bonds
• Money market mutual funds
• Mutual funds
• Treasury securities
• Certificates of deposit (CDs)

As with FDIC coverage, SIPC coverage exists to protect you if the institution fails. However, it doesn't protect you from investment losses due to normal market fluctuations or ordinary investment risks.

The SIPC coverage limit is $500,000, including up to $250,000 in cash. If you have more than one account, coverage is determined by what the SIPC calls "separate capacity," similar to the way FDIC applies its coverage to each account type.

Separate capacities include these accounts, among others:

• Individual accounts
• Joint accounts
• Trust accounts
• Accounts held by executors for estates
• Accounts held by guardians for minors
• IRAs*

As an example, if you have an individual brokerage account and a Roth IRA that's completely invested in securities, then SIPC coverage would apply separately to each for a total of $1,000,000. But if you had two individual brokerage accounts at the same firm worth $250,000 each, your coverage would be only $500,000 total.

When considering which is better—FDIC or SIPC—it comes down to the type of accounts you're trying to protect. Many people are covered by both because they have investment accounts at brokerage firms and deposit accounts at banks.

Although most reputable institutions are covered, SIPC and FDIC do not protect the accounts of every bank or brokerage firm. It's important to make sure your institution is a member of the appropriate organization in order to receive protection.

FDIC-member banks will prominently display the FDIC logo. If you want to verify a bank's status, you can call the FDIC at (877) 275-3342 or check the FDIC Bankfind website.

SIPC members also tend to display their status publicly. The majority of brokerage firms are covered by SIPC because any firm that engages in business with the public—either by selling securities or that clearly trades in these transactions—is required to be a member. If a firm is not an SIPC member, it's required to disclose that to you. If you want to verify, you can call the SIPC at (202) 371-8300 or check the online membership directory.

As you plan your financial path with purpose, ensuring your hard work is protected is important. A financial advisor can walk you through all the possibilities for help safeguarding your money so you can focus on achieving your financial goals with more certainty.