U.S. raising insurance limit for retirement accounts


March 12, 2006|By EILEEN AMBROSE

The federal insurance limit for retirement accounts at banks will more than double to $250,000 this year - just in time for retiring baby boomers.

The increased coverage will apply to accounts such as Keoghs, individual retirement accounts and individual 401(k)s. The new limit could kick in as early as next month, although it will be in place in November at the latest.

"Our hope is to make it before the April 15 date because many banks really encourage additional contributions through IRAs and rollovers before the tax date," said Jim Chessen, chief economist at the American Bankers Association.

The insurance limit on other bank deposit accounts will remain the same at $100,000 at least until 2011.

Beginning then, and every five years thereafter, the limits on other bank deposits and retirement accounts can be raised in increments of $10,000 based on inflation, said David Barr, spokesman for the Federal Deposit Insurance Corp., which insures banks and thrifts.

(The increased limits also will apply to credit unions, whose insurance comes through the National Credit Union Share Insurance Fund.)

FDIC insurance comes into play when a bank fails. That hasn't occurred since June 2004, leaving a record number of days between bank failures. Still, when it happens, consumers whose account balance exceeds the insurance limit can lose money.

Often, these tend to be retirees who keep retirement savings in a bank account for easy access.

Barr recalls the 1999 failure of the First National Bank of Keystone in West Virginia that had a reputation as one of the healthiest, best-run community banks in the country.

"It literally failed overnight from fraud," Barr said. "Half the assets were completely gone. A lot of retirees lost their money."

Coverage was last raised in 1980 - from $40,000 to $100,000. Legislation to raise the insurance limits at a more rapid pace had stalled for years.

Small banks in particular wanted the coverage bumped up to attract and retain local customers who might otherwise think it's safer to keep big balances in large institutions, experts said.

Meanwhile, the opposition, which included former Federal Reserve Chairman Alan Greenspan and two Treasury secretaries, worried that banks might take on greater risk if limits were raised, consumers wouldn't care as long as they were insured, and a potential bailout by taxpayers would be steeper, experts said.

A compromise was reached. Insurance limits on most accounts will rise more slowly. And protection for retirement accounts, which was less of an issue, was increased more quickly, experts said.

The rules on FDIC insurance can be confusing. If you're unsure, call the FDIC at 877-ASK- FDIC (877-275-3342) or go to the agency's online Electronic Deposit Insurance Estimator at www.fdic.gov.

The Web program will ask about your accounts and calculate whether all deposits are covered.

Coverage is not $100,000 per person or per account, common misperceptions. It's based on account ownership, and consumers can be insured for far more than $100,000 depending on how accounts are titled.

The more common types of ownership are joint accounts held by two or more people; single accounts titled in one person's name; retirement accounts; and trust accounts, such as "payable-on-death" accounts where a beneficiary is named to receive the holdings when the owner dies.

Say an individual has $200,000 spread across savings and checking accounts and a certificate of deposit. Because the three accounts are titled in one person's name only, they are added together and insured up to $100,000.

But take the case of a married couple with a variety of accounts under different ownership. Say they have a joint account, but each has an IRA, a savings account and a trust account naming the other spouse as the beneficiary.

The joint account is covered up to $200,000. Each savings and trust account is insured for up to $100,000 each, for a total of $400,000.

Retirement accounts are treated separately. Assuming the new limits are in effect, the IRAs would be covered for up to $250,000 each, or $500,000 total. Altogether, the couple's accounts would be insured for $1.1 million.

"It's tricky," said the FDIC's Barr. "Even bankers get it wrong."

In an informal survey of 10 Baltimore bank branches last week, half of them correctly answered that the maximum coverage for a married couple's joint account is $200,000. That's better than in 2002, when, in a similar survey, two out of 10 bank branches got it right.

Sarah Lifshin, a spokeswoman with the Maryland Bankers Association, said banks train staffers about coverage.

"We do take it seriously," she said, adding that consumers should inform branch managers if they receive incorrect information.

Barr said his agency has seen bank failures where customers ended up with uninsured money because of wrong advice from bankers or financial advisers.

"That doesn't help them out in the bank failure," he said. "The responsibility ultimately rests with the person who owns those accounts."


Podcasts featuring Eileen Ambrose can be found at baltimoresun.com/ambrose.

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