Turmoil in the stock market and bank failures worry people, especially anyone who has a bank handling their IRA account. If you move money out of one IRA into another, keep in mind the rules on FDIC insurance, which protects any kind of a "deposit account" up to a limit, and with certain conditions.
The Federal Deposit Insurance Corporation insures depositors against losses caused by bank failures. The original limit on this insurance, set in 1934, was $2,500; by 2012 the coverage had grown 100-fold to $250,000 per account type, per depositor, per bank. FDIC insurance does not specifically cover IRA rollovers. It applies instead to bank accounts, which may or may not be IRAs. A single account holder may have more than one retirement account (such as a Roth IRA, a 401(k), a Keough plan, a SEP or SIMPLE IRA); however, the coverage limit of $250,000 applies to the total amount of all such accounts held in a single bank.
A rollover is a transfer of money from one IRA account to another. A common rollover would be from a traditional IRA, which allows pre-tax contributions, to a Roth, from which qualified withdrawals are free of income tax. Although the IRS normally penalizes early IRA withdrawals (those made before the age of 59 1/2), it waives these penalties on a rollover if you re-deposit the money within 60 days. Money that you hold before moving it to the new account is not FDIC insured. But once you deposit your funds, you can apply FDIC insurance limits to more than one account at a single bank. The agency applies the limit to different account categories, such as individual accounts, joint accounts and IRAs.
If you roll over more than $250,000 in IRA money to a new account at a bank, your FDIC coverage limit for that account type remains $250,000. Any excess in the IRA would not be FDIC insured, and in order to insure all of the money you would have to split it up among more than one bank. In addition, FDIC coverage does not extend to IRA accounts managed by stockbrokers, mutual funds or individual trustees, even if these account managers are working as affiliates or subsidiaries of a bank.
What Is Covered
FDIC insurance does not cover stocks, options, futures, commodities, corporate bonds, mutual funds, Treasury bills or notes, life insurance policies or municipal bonds. The insurance would cover cash on deposit, money market funds or certificates of deposit. In addition, the insurance does not cover penalties levied on the account by the IRS for early withdrawals. The IRS does not permit loans from an IRA -- any time you take out money, it is considered a distribution, subject to penalties and tax unless a rollover is complete within 60 days.
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