Do you know how your IRA, 401(k), pension or other retirement savings would be insured against loss if it were deposited in an FDIC-insured institution that later failed? The rules can be tricky, so here’s an overview.

Thanks in part to laws that encourage Americans to work and save for their golden years, it’s possible for you or someone you love to gradually accumulate a fairly large sum of money in various types of retirement accounts. The most common such account is the Individual Retirement Account, or “IRA.” But you also may have retirement funds building in accounts established for you by an employer in connection with a pension or profit-sharing plan, or the increasingly popular “401(k)” plan. You know how important they are to your future. But do you know how these accounts would be insured against loss if they were deposited in an FDIC-insured bank or savings institution that later failed? The insurance rules governing retirement accounts and employee benefit plans can be tricky. That’s why FDIC Consumer News offers the following overview as part of an ongoing look at how the FDIC insures different types of deposit accounts.

Here’s the first thing to know: If you have deposits in employee benefit plan and retirement accounts at an FDIC-insured institution, this money is insured separately from your funds in other types of deposit accounts, such as individual, joint and payable-on-death (“POD”) accounts. Let’s say that at the same bank you have three accounts — a savings or checking account in your name, a joint account with another person and an IRA. Under the rules, each type of account would be insured separately from the others for up to $100,000, for a combined maximum of $300,000.

That’s simple enough. However, because of deposit insurance laws enacted by Congress, certain other aspects of the FDIC’s rules can be tricky, so please keep reading.

•    Employer-sponsored 401(k), pension or profit-sharing plans. The rules governing deposits in these accounts at an FDIC-insured bank or thrift are a bit complex mainly because, by law, your insurance coverage depends on the amount of capital the institution had when the funds were deposited. Worth worrying about? Maybe...maybe not. This requirement applies mostly to very large accounts maintained by employers with many employees in the benefit plans. Also, these days, most banks and thrifts meet the capital requirements. Given this, it’s likely that your share in these accounts is covered for up to $100,000, even if the account itself totals far more than $100,000. This is known as “pass-through” insurance, because the insurance “passes through” to each individual participant. As we said before, this coverage would be in addition to the FDIC insurance for your individual, joint and POD accounts at the same institution.

But how can you know your funds in these accounts are fully insured? It’s usually too difficult for the average consumer to know whether an institution meets the criteria for pass-through insurance, so perhaps your best approach is to ask your employer’s benefit plan administrator. In general, it’s that person’s responsibility to keep the funds in a well-capitalized institution and to maximize the insurance coverage for the benefit plan’s participants.

•    Individual Retirement Accounts. You now know your IRA money at a bank would be separately insured from other types of accounts there. But here again there are some significant distinctions based on the laws. First, in most cases, your IRA money in an insured bank or thrift also is insured to $100,000 separately from your employer-sponsored pension money at the same bank. This means if you have $100,000 on deposit in an IRA and $100,000 on deposit in a 401(k) account at the same bank, all of it is fully and separately insured. But if your 401(k) account or some other employer-sponsored pension money at the bank is “self-directed” —meaning you decide which bank or thrift should get the deposit — this money would be added to your IRA deposits at the same institution and insured up to a total of $100,000. This would apply primarily to self-directed “Keogh” plan accounts (similar to an IRA but for the self-employed) and 401(k) accounts.

And what about the insurance coverage of the new Roth IRA, which Congress created in 1997 and which will become effective in 1998? Many consumers are considering opening a Roth IRA because all earnings and withdrawals will be tax-free if the account is held for at least five years and you’re at least 59 1/2 years old. The FDIC is still looking at how the current insurance rules apply to this new account. However, Joe DiNuzzo, an FDIC attorney in Washington who specializes in deposit insurance matters, says “it’s likely that the Roth IRA would be considered under the traditional IRA category for deposit insurance purposes. This means if you have a traditional IRA and a Roth IRA at the same insured bank or thrift, the amounts in both accounts likely would be combined and insured in the aggregate to $100,000.”

DiNuzzo says that the FDIC also is working on a legal opinion regarding the insurance coverage of the so-called “Education IRA,” which is different from the traditional IRA in many respects because earnings used for college or certain other education expenses grow tax-free. When final decisions are made about the insurance coverage of the Roth and Education IRAs, FDIC Consumer News will report on them.

Final Thoughts

Periodic statements tell us how the value of our retirement accounts have changed. If some of these statements come from FDIC-insured institutions, check the bottom line to see how the account is doing, while keeping the $100,000 limit in mind. If you have less than $100,000 in retirement-related deposit accounts at banks and thrifts, you don’t need to worry about the safety of these funds if the institution were to fail. But if you have more than $100,000 in retirement funds at one institution, consider putting the money into more than one institution. Even then, it would be a good idea to check up on your insurance coverage periodically. Among the reasons: If two institutions where you have money decide to merge, after a grace period your accounts could be combined for insurance purposes, resulting in some of your money exceeding the $100,000 insurance limit.

For more information, read the FDIC booklet Your Insured Deposits, which is available free of charge from your local bank or thrift or the FDIC’s Public Information Center. If you still have questions about the coverage of your retirement funds or other deposits, call or write the FDIC’s Division of Compliance and Consumer Affairs for answers from one of our insurance specialists.