Is Uninvested Cash in IRA Accounts FDIC-Insured?
The Federal Deposit Insurance Corporation was created to protect deposit account holders from losing their money if a bank goes out of business. Whether the uninvested cash in your Individual Retirement Account is covered by the FDIC or not depends on the institution that holds your IRA and how much you have invested.
FDIC-Insured Institutions Only
The FDIC only applies to cash in deposit accounts at member institutions, such as checking accounts, savings accounts, retirement accounts and money market deposit accounts. However, your financial institution might "sweep" any uninvested cash into a savings account at the end of each day so that not only is it covered by FDIC insurance up to the coverage limits, but you also might earn some interest. If the cash isn't held at a member institution, the money isn't covered.
FDIC Coverage Limits
As of 2013, FDIC insurance coverage extends to up to $250,000 per person, per account type, per bank. What that means in practice is that the money in your IRA is counted separately from your cash in other non-retirement deposit accounts at the same bank. For example, if you have a $200,000 checking account and $200,000 of uninvested cash in your IRA at the same bank, it's all covered because checking accounts are a different category from IRAs. In addition, what you have in your IRA at one bank is counted separately from what you have at a second bank. For example, if you have $180,000 in your IRA at Bank I and $220,000 in your IRA at Bank II, you're still fully covered because the $250,000 limit applies to each bank separately.
Credit Union Coverage
If you keep your IRA at a credit union, you won't be covered by the FDIC because FDIC coverage only applies to banks. However, you're still protected because the National Credit Union Administration covers credit union accounts in the same way and to the same extent that the FDIC covers banks. For example, if you have up to $250,000 of uninvested cash in your IRA at a member credit union, you're still protected if the credit union goes out of business.
If your financial institution isn't a bank or credit union, you're also not always out of luck. The Securities Investors Protection Corporation protects you from both the loss of uninvested cash and securities due to a brokerage going out of business. Unlike FDIC insurance, you're protected for up to $500,000 of stolen securities and uninvested cash as of 2013. However, no more than $250,000 of that can be uninvested cash. For example, if you have $300,000 of uninvested cash and $100,000 of securities that are stolen by a rogue broker, you would recover all the securities but only $250,000 of the uninvested cash.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."