On April 1st the Federal Deposit Insurance Corporation (“FDIC”) will increase its deposit insurance coverage of retirement accounts from $100,000 to $250,000. [1]  This change represents the first boost to coverage in over twenty-five years. [2]  Despite coverage for non-retirement accounts staying at the current level of $100,000, the increase in coverage for retirement accounts will be beneficial to consumers and banks alike. [3]

The last increase in deposit insurance coverage took place in 1980 when it was raised from $40,000 to $100,000. [4]  However, many Americans now have much more than $100,000 in retirement savings.  [5]  This meant they were forced to bank at multiple institutions in order to have all of their retirement funds insured. [6]  Under the new law, individuals will be able to have up to $250,000 in retirement funds at one bank. [7]  This will make banking easier for consumers and increase profits for banks.

Despite the caps, it is still possible to have all of one’s funds at a single institution and have them insured as retirement and non-retirement accounts are treated differently for insurance purposes. [8]  Retirement accounts, no matter which type, are added together and the total is insured up to $250,000. [9]  Non-retirement accounts are not totaled, rather each category of account is insured separately up to $100,000. [10]  For instance an individual may have a checking account, a joint account with their spouse, a retirement account, and trust account benefiting their spouse and child.  The checking account will be insured up to $100,000.  The joint account will be divided in half and each half treated separately. [11]  This means that a couple may have up to $200,000 in a joint account and it will still be insured as each spouse’s $100,000 share is insured separately. [12]  As noted above retirement accounts will now be insured up to $250,000. [13]  Trust accounts receive up to $100,000 of insurance protection per beneficiary, not depositor. [14]  Thus an individual could have a $200,000 trust naming his wife and child as beneficiaries and the full $200,000 would be insured. [15]  Under this system one could have $650,000 (or more if the trust has more than two beneficiaries) deposited at one institution and still have their funds insured by the FDIC.

While the increase in coverage for retirement accounts has been welcomed, some feel that the FDIC should have also raised its coverage for regular accounts as the insurance cap of $100,000 does not account for the inflation of the past twenty-six years.  [16]  To keep place with inflation it is claimed that coverage on regular accounts should be raised to $235,000 or at least doubled. [17]  Additionally, the $100,000 insurance cap favors large banks over small ones as consumers are more willing to trust major banks with accounts that exceed the insurance cap and leave some funds uninsured. [18]

While it is not a panacea, the increase in FDIC deposit insurance coverage for retirement accounts is a change that should be welcomed by all Americans.  Consumers will now be able to have fewer accounts resulting in fewer hassles and fewer bank fees, while banks will be able to handle the entire retirement savings of individuals rather than only receiving a share.

[1] Laura Bruce, Deposit Insurance Reform: What it Means to Consumers, Yahoo, March 16, 2006, http://biz.yahoo.com/brn/060316/18251.html?.v=1

[2] PR-29-2006, FDIC Insurance for Retirement Accounts Increased to $250,000 Higher Coverage Takes Effect April 1; Basic Insurance Limit for Other Accounts Stays at $100,000, March 14, 2006, http://www.fdic.gov/news//news/press/2006/pr06029.html

[3] Bruce, Supra, Note 1.

[4] Id.

[5] FDIC Consumer News, Special Bulletin April 2006, What You Should Know About Higher FDIC Coverage for Retirement Accounts, http://www.fdic.gov/consumers/consumer/news/special/specialApril06.pdf

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Bruce, Supra, Note 1.

[17] Id.

[18] Id.