Account balances over $250,000

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make_a_better_world
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Account balances over $250,000

Post by make_a_better_world » Wed Aug 23, 2017 4:21 pm

I am curious what the investors here do when accounts exceed the FDIC insurance limits by large amounts. I have done some research, and the standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category.

In my situation, it primarily applies to a taxable account for investment after retirement account contributions are exhausted, but I can see how this could apply to any account type provided the balance is sufficiently high enough. I like being inside Vanguard and using tax efficient Vanguard funds.

In the unlikely event Vanguard itself faced solvency issues, if your money is primarily invested inside a fund instead of cash does that make it secure?

Do you open similar accounts at other investment banks?
Do you just take the risk?
Do you acquire some sort of private insurance?

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TomatoTomahto
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Re: Account balances over $250,000

Post by TomatoTomahto » Wed Aug 23, 2017 4:45 pm

This has been discussed many times, but I'm too lazy to Google it.

We have considerably more than $250k at Vanguard, Fidelity and DW's employer, but in funds rather than cash. I worry about many things, but not this.

ETA: the Vanguard account is mostly a taxable account, so directly comparable to your question. Other accounts are mostly tax advantaged.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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dm200
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Re: Account balances over $250,000

Post by dm200 » Wed Aug 23, 2017 4:49 pm

make_a_better_world wrote:
Wed Aug 23, 2017 4:21 pm
I am curious what the investors here do when accounts exceed the FDIC insurance limits by large amounts. I have done some research, and the standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category.
In my situation, it primarily applies to a taxable account for investment after retirement account contributions are exhausted, but I can see how this could apply to any account type provided the balance is sufficiently high enough. I like being inside Vanguard and using tax efficient Vanguard funds.
In the unlikely event Vanguard itself faced solvency issues, if your money is primarily invested inside a fund instead of cash does that make it secure?
Do you open similar accounts at other investment banks?
Do you just take the risk?
Do you acquire some sort of private insurance?
I am not in that "category" but for persons (not organizations or companies) for NCUA insured credit unions and FDIC insured banks:

1. Retirement (IRAs) accounts have a separate $250,000 insured limit.

2. Individual and joint accounts are insured (and have limits) separately. If "John Smith" has an individual (not joint) account with $250,00 and a joint account (say with Mary Smith) with $500,000 - all $750,000 is dederally insured in any FDIC insured bank or NCUA insured credit union.

BHUser27
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Re: Account balances over $250,000

Post by BHUser27 » Wed Aug 23, 2017 4:50 pm

I am not 100% sure what you are asking.
Does this help at all:
https://personal.vanguard.com/pdf/s317.pdf

petiejoe
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Re: Account balances over $250,000

Post by petiejoe » Wed Aug 23, 2017 4:55 pm

The FDIC doesn't do anything for investment products. I don't think most people here would recommend keeping $250,000 in cash. If you have a CD ladder that exceeds the FDIC limit, you should consider diversifying across banks to stay under the insurance limit. If you have enough money in CDs that this is a significant burden, you probably should ask whether you have too much locked in CDs.

student5
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Re: Account balances over $250,000

Post by student5 » Wed Aug 23, 2017 4:57 pm

This FDIC calculator may be helpful for coverage estimates regarding bank accounts: https://www5.fdic.gov/edie/

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oldcomputerguy
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Re: Account balances over $250,000

Post by oldcomputerguy » Wed Aug 23, 2017 5:08 pm

make_a_better_world wrote:
Wed Aug 23, 2017 4:21 pm
I am curious what the investors here do when accounts exceed the FDIC insurance limits by large amounts. I have done some research, and the standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category.

In my situation, it primarily applies to a taxable account for investment after retirement account contributions are exhausted, but I can see how this could apply to any account type provided the balance is sufficiently high enough. I like being inside Vanguard and using tax efficient Vanguard funds.

I believe you're confused. Cash deposits in banks as well as most CD's are insured against loss by the FDIC. But that doesn't apply at all to money invested in stock or bond mutual funds or ETFs, no matter what account you're holding them in. The money you invested in Vanguard funds is not insured by FDIC.
"I’ve come around to this: If you’re dumb, surround yourself with smart people; and if you’re smart, surround yourself with smart people who disagree with you." (Aaron Sorkin)

runner540
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Re: Account balances over $250,000

Post by runner540 » Wed Aug 23, 2017 5:29 pm

FDIC insurance applies only to deposit accounts at FDIC insured institutions. Does not apply for investment accounts.
Brokerage accounts should be covered by SIPC up to $500k if the firm is a member of SIPC (note it's not protection against investment losses, only for if your assets go missing at a failed institution.
https://www.sipc.org/for-investors/what-sipc-protects

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make_a_better_world
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Re: Account balances over $250,000

Post by make_a_better_world » Wed Aug 23, 2017 6:30 pm

BHUser27 wrote:
Wed Aug 23, 2017 4:50 pm
I am not 100% sure what you are asking.
Does this help at all:
https://personal.vanguard.com/pdf/s317.pdf
Thank you this link was very helpful.

As some have said the FDIC does not insure stocks/funds; it is the SIPC and the limit is 500k not 250k. But this does not really change the spirit of my question - what would happen to your funds if your account is worth well over 500k and the custodian you use went insolvent? And should you or do you do anything to protect against that?

If any are curious this is how I understand it now for Vanguard:
  • Vanguard is a member of the SIPC and your securities have insurance up to 500k.
  • Vanguard keeps your securities inside "qualified investment banks" such as The Bank of New York Mellon, Brown Brothers Harriman & Co., JPMorgan Chase Bank, and State Street Bank and Trust Company.
  • Your securities are not traded by Vanguard and if Vanguard went insolvent, you would still retain ownership of your securities.
  • There are some safeguards if the investment bank Vanguard uses goes insolvent: Your securities cannot be used to satisfy liens against the creditors of the distressed investment bank. The investment bank is supposed to keep securities of this nature separate from its own trading practices.
Many people might believe it is far fetched that the investment bank could itself go bust but it has happened or come close. Think Lehman Brothers, Bank of America, or Goldman Sachs in 2008 with buying CDOs and selling CDS. Lehman Brothers went bankrupt in 2008 after existing for 150 years and was the 3rd largest brokerage firm at the time. I just looked up what happened to its customers and found it reassuring that they were not effected by the bankruptcy filing and were able to transfer their funds to another brokerage firm.

So in conclusion, there is a very low, almost trivial risk involved with keeping a high balance inside Vanguard and no action is needed.

Helo80
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Re: Account balances over $250,000

Post by Helo80 » Wed Aug 23, 2017 6:47 pm

make_a_better_world wrote:
Wed Aug 23, 2017 4:21 pm

In the unlikely event Vanguard itself faced solvency issues, if your money is primarily invested inside a fund instead of cash does that make it secure?
http://jlcollinsnh.com/2012/09/07/stock ... ets-nuked/

You've asked a really great question, but it's honestly a non-issue. Your money is safe as investing $1 million (or whatever) in Vanguard, is not actually placing the money into Vanguard's hands to *hopefully* buy $1million in S&P500 index funds. If Vanguard collapsed tomorrow, our monies would be safe as third-party middle-men are the actual holders of our assets.

alex_686
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Re: Account balances over $250,000

Post by alex_686 » Wed Aug 23, 2017 7:14 pm

make_a_better_world wrote:
Wed Aug 23, 2017 6:30 pm
As some have said the FDIC does not insure stocks/funds; it is the SIPC and the limit is 500k not 250k. ... So in conclusion, there is a very low, almost trivial risk involved with keeping a high balance inside Vanguard and no action is needed.
To extend a bit, I am not sure the last time SPIC was taped. The internal operations of a brokerage is audited by both external auditors and government regulators. Incompetence is not sufficient for you to lose your assets, as you have pointed out. It would more or less have to be outright fraud or theft. I will point out that Madoff was outside SEC (and thus SPIC) oversight to commit his fraud.

gpburdell
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Re: Account balances over $250,000

Post by gpburdell » Wed Aug 23, 2017 11:32 pm

https://www.fidelity.com/why-fidelity/s ... r-accounts
According to this, Fidelity has additional coverage above the SIPC limit for a total of 1 billion if I understand it correctly. That doesn't sound like alot given Fidelity has 2 trillion in assets.

Vanguard has something similar but for only 250 million:
https://investor.vanguard.com/investing ... on?lang=en

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