Is Buying A CD Well Above The FDIC 250K Deposit Limit At A Smaller Financial Institution Risky?

sams1985 | Aug 11, 2022 | 781 posts since 2022

I'm probably as risk averse as they come. I've worked really hard to build my retirement savings and am trying to figure out the best move here. I've been waiting patiently on the sidelines but the bigger banks are dragging their feet on raising CD rates. I doubt they need the cash flow.

I see some of the smaller, unknown credit unions offering eye catching rates. My investment is well above the 250k deposit limit. Is it risky to buy these CD's or wait for the bigger(in theory, safer) banks ? I was told that even if i open multiple accounts, i'd still be insured to 250k max because its one account owner. Is this true? What would you do in this situation?

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Answers

RichardW | Aug 11, 2022 | 810 posts since 2019

For a direct CD with 5 or fewer beneficiaries, the owner’s deposits are FDIC insured up to $250,000 for each unique beneficiary. In the case of a direct CD with one owner and 5 unique beneficiaries it could be insured up to $1,250,000. The beneficiary must be a living person, a charity or a non-profit organization. As long as your bank is FDIC insured your direct CD should be insured. This topic is explained starting on page 12 (labeled as page 10) in the following 31 page FDIC pdf:
https://www.fdic.gov/resources/deposit-insurance/brochures/documents/your-insured-deposits-english.pdf

FirstNation | Aug 11, 2022 | 85 posts since 2021

Personally, I'd never go over the 250K FDIC limit for one owner per type of account.
You can have 250K in a taxable account, 250K in an IRA account and 250K in an HSA account.
From my understanding of it, you could have 750K in one institution and be fully covered.

Although it's more inconvenient, it's definitely safer to spread-out money over several banks and CUs.
Some people lost principal during the 2008 crash because they got cute with the FDIC limits.
If you stay within the 250K limit at a single institution you know that you're in good shape.

As far as size goes, that's sort of a red herring (they tend to merge with another one before failing).
Some of the smaller credit unions have been around since the Great Depression.
On the other, hand it was some of the largest banks that had to be bailed-out in the Great Recession.

Also, it's probably a good idea to "ladder" any CD's that you purchase.
You never know when you might need the money.
Spreading-out the maturity dates helps solve that problem.

With rates rising, most folks are just nibbling their way into CD purchases (50K chunks at a time).
The Navy add-on CD is a good start (it's only 1K to open and lets you add another 99K).
And, any 4% CD available right now is a good deal at any FDIC/NCUA insured bank/CU.

Personally, I've been purchasing TIPS because I don't want to get bit by "unexpected inflation" again.
But, the yields are so low that you have to have enough maturing each year to cover the IRA RMD's.
And, they're more complicated than just purchase CDs.

Finally, take any advice you get on a "forum" with a grain of salt (including mine).

sams1985 | Aug 12, 2022 | 781 posts since 2022

Thank you for your thoughtful and thorough response. I only assumed the larger banks would be safer (because of a potential bailout and thus much less likely to actually fail) Going bank 10-15 years it seems like bank failure is more common than a credit union failing- although the latter does happen from time to time. I think the best suggestion is to ladder like you said and just spread 500k over multiple banks- enough to make sure my wife and i are covered

me1004 | Aug 12, 2022 | 1,379 posts since 2010

Yes, as if not protected and the fanancial instituion goes under, you can lose everything over the insured limit. Normally, the FDIC and NCUA will seek another bank or credit union to take over the failed bank and 100% of its accounts, insured or not. But that is not certain, they have let some go under.

However, as others have noted, you can increase you coveage by adding beneficiaries (at least two), or a joint owner.

As for the risk, the bank and credit union rates are so dismal, that if your money is not even covered by the insurance, you are a fool to invest it at bank rates. You can invest in pretty safe investments that will yield a lot more.

Ltssharon | Aug 12, 2022 | 471 posts since 2020

I would not go over the amount that Richard and others speak of. Never ever. Also, know that if you go through a broker, say Vanguard, and buy a CD from, say Discover that way, the amount of the Vanguard purchased Discover CD, AND any CD's you bought directly from Discover, when combined must follow the rules of RichardW and others.

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