Roth IRAs

One way the Roth IRA differs from a traditional IRA is that contributions to a Roth IRA are not deductible from taxable income. On the other hand, for many people the earnings on a Roth IRA are tax-free whereas earnings on a traditional IRA are only tax-deferred.

While the Roth IRA has different characteristics than the traditional IRA, the FDIC Legal Division says that both will be treated the same for deposit insurance purposes. This means that the deposits you have in Roth IRAs and traditional IRAs at the same FDIC-insured bank or thrift will be added together and insured (along with certain other retirement-type accounts you may have there) up to a total of $100,000. This IRA coverage is separate from the FDIC insurance for your other types of deposits, such as individual or joint accounts.

Education IRAs

Think of Education IRAs as trust accounts established exclusively to pay for a beneficiary’s tuition for college, graduate school or post-secondary vocational school. Generally, earnings on an Education IRA are exempt from federal taxes if they don’t exceed the student’s education expenses.

For FDIC insurance purposes, an Education IRA will not be treated as a retirement-type account. Instead, it will be insured as an “irrevocable trust account” — a type of account a depositor sets up on behalf of a beneficiary and that cannot later be changed or nullified.

So, any Education IRAs and irrevocable trust accounts you have at an insured institution generally will be added together and protected for up to $100,000 per beneficiary. This coverage is separate from the FDIC insurance given to other types of deposits (individual accounts, joint accounts, retirement accounts, etc.) that either the depositor or the beneficiary might have at that institution.

Final Thoughts

The bottom line: If you’re considering opening or adding to one of these new accounts, and you or your family have $100,000 or more on deposit at that institution, we urge you to double-check to make sure that the funds are fully protected in the event that the institution fails.

“These types of accounts can be complex and don’t always fit neatly into any of the categories of deposit insurance coverage,” says Joe DiNuzzo, an FDIC attorney in Washington and an expert in the deposit insurance rules.

“Depositors with more than $100,000 at one insured bank or thrift should familiarize themselves with the deposit insurance implications involved.”