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The Honolulu Advertiser
Posted on: Thursday, March 30, 2006

Retirement savings coverage rises

USA Today


Accounts insured by the Federal Deposit Insurance Corp.:

• Checking accounts, including money market deposit accounts

• Savings accounts, including passbook accounts

• Certificates of deposit

• Retirement accounts invested in deposits at a bank or thrift

Not insured by the FDIC, even if bought through a bank:

• Mutual funds

• Stocks

• Bonds

• Annuities

• Safe-deposit boxes

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Bank certificates of deposit have about as much pizazz as a bowl of oatmeal. Yet, for many retirees who want to invest their savings in a safe, predictable place, that's just fine.

Savers who shop around can earn about 5 percent on a one-year CD, and rates are expected to move higher in the next few months. Even if the bank fails, the deposits are insured by the federal government. The only drawback: The federal insurance guarantee is limited to $100,000.

That's about to change. On Saturday, the Federal Deposit Insurance Corp. will boost coverage of individual retirement accounts held in banks and credit unions to $250,000, the first increase in deposit insurance since 1980.

The higher limit also will cover bank deposits in Keogh plans, self-directed 401(k) plans and "457 Plan" accounts for state government employees.

Though CDs are an extremely conservative investment for an IRA, a surprising number of retirees have large amounts of their savings invested in them because they want to protect their principal. At the end of 2005, federally insured banks reported $226 billion in deposits held in IRAs and Keogh accounts, according to the FDIC.

The higher insurance limit was included in a budget reconciliation bill signed by President Bush last month. The FDIC adopted the rule quickly so savers could take advantage of it during tax season, when many people invest in IRAs. Investors have until April 17 to contribute to their 2005 IRAs. (That's because April 15 falls on a Saturday this year.)

Federal deposit insurance protects depositors in the unlikely event that the bank goes out of business.

Fortunately, bank failures are rare. The last one occurred in June 2004, making this the longest period without a bank failure in the FDIC's history, according to FDIC spokesman David Barr.

When it does happen, though, the fallout can be devastating.

In a bank failure, the FDIC will write checks to cover insured deposits. But customers with uninsured deposits "have to wait in line with all the other (uninsured) depositors to get their money back," says Kathleen Nagle, consumer protection specialist at the FDIC. That can take years, and customers are rarely made whole.

Many retirees are unwilling to take such risks with their money, even if the likelihood of a bank failure is small, says Jim Chessen, chief economist for the American Bankers Association. The ABA occasionally surveys consumers about deposit insurance, and "it's remarkable how important it still is," he says.

You don't have to do anything to take advantage of the new limits. If you have more than $100,000 in bank deposits in your IRA, the amount insured will automatically increase on Saturday.

But there are a few things to keep in mind:

  • To qualify for federal insurance, your IRA must be invested in bank deposits, such as CDs, Nagle says. The FDIC doesn't insure mutual funds, stocks, bonds or annuities, even if you bought them through your bank.

  • The maximum FDIC coverage for non-IRA deposits will remain at $100,000. The law sets up a formula for the FDIC to consider increasing limits on all deposits every five years, based in part on inflation.

    The FDIC has a lot of useful tools on its site, www.fdic.gov, including the Electronic Deposit Insurance Estimator, an interactive tool that will summarize your insurance coverage.

    You also can call the FDIC at (877) 275-3342, weekdays from 8 a.m. to 8 p.m. Eastern time.