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Are FDIC/NCUA Coverages Relevant These Days?

Bozo | Mar 30, 2017 | 936 posts since 2011

Here's a radical idea, sure to spawn controversy. For years and years, we have been led to believe that FDIC/NCUA insurance was vital. Accordingly, we were advised never to exceed FDIC/NCUA limits, especially on IRA accounts, where the $250,000 limit was sacrosanct.

Problem being, some financial institutions offer very tasty interest rates. Example: Patelco just came out with 2.75% on its 5-year. Is it irrational to plop $270,000 in an IRA CD with Patelco? While other financial institutions might offer the same or similar rates, is it folly to disregard FDIC/NCUA limits?

For example, for the past seven years, I have had $350,000 in a CD with USAA. Was I concerned? No. USAA has been around longer than I.

OK, weigh in. Do FDIC/NCUA coverages really matter all that much today in your investing decisions, or is it all about rates and terms?

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Kaight | Mar 30, 2017 | 178 posts since 2011

I understand your thinking. I confess I'm doing the same thing at both PenFed and at AgFed. It does create pressure to watch carefully Ken's ratings! In addition, I take no pride whatsoever in this approach, I respect the need for Federal deposit insurance, and I could not in good conscience advise another person to follow my poor example.

All of that said, there are two more salient matters I must mention related to deposit security. First, neither FDIC nor NCUA protects us in the instance of fraud. And given your mention regarding the solidity of USAA, there being countless other examples as well, I think fraud is today at least as great a risk as institutional failure. Second, along the same lines, and notwithstanding what I just wrote above, my security focus today involves use of deposit spreading. This means having on deposit, at any single financial institution, no more than a quarter million dollars. This is something about which I wrote earlier this month in greater detail, here:

https://www.depositaccounts.com/community/misc/27011-wikileaks-372017-dump-confirms-deposit-spreading-decision.html

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ChasR | Mar 30, 2017 | 234 posts since 2013

I remain wedded to obligations backed by the full faith and credit of the United States. I pay a heavy price in terms of yield but I'm able to absorb it comfortably.
For those less conservative types, I can understand going into GSAs and even Munis. But corporate debt if off the table.
Here's why. Back when I was practicing law, I learned how to (and did) turn investment grade debt securities into junk bonds. We did this to benefit stockholders to the detriment of creditors--through leveraged buy-outs, stock buy-backs, mergers and the like--and it was perfectly legal. It's funny how easily the managements of long-established companies with good credit ratings can decide that those ratings aren't important any more. All they need is a promise from an investment banker to double their stock values, and the company's AA bond is turned into a piece of cow dung,

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ChasR | Mar 30, 2017 | 234 posts since 2013

Sorry. I meant "GSEs."

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ChasR | Mar 30, 2017 | 234 posts since 2013

Having made my general statement about credit quality, I shouldn't ignore the strategy you seem to be pursuing over going over the FDIC or NCUA limit at insured banks or credit unions. The regulation the institution is subject to can give you a lot of comfort, and sometimes uninsured deposits are assumed by another institution in a failure scenario. Plus, there is a market out there for "jumbo" bank CDs that aren't insured.
From the standpoint of financial theory, however, if I buy your $270,000 Patelco IRA CD, I feel I should get a higher rate on the $25,000 overage.
BTW--I'm already over the FDIC limit with a Synchrony IRA CD of mine. I'm going to reduce it shortly by making a penalty-free QCD withdrawal.
.

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ChasR | Mar 30, 2017 | 234 posts since 2013

Change "$25,000" to "$20,000."
Someday I'll learn how to proofread computer typing!

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jib2424 | Mar 30, 2017 | 13 posts since 2014

Why is it more important to observe the $250,000 limit on an IRA account than it is on a standard account?

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ChasR | Mar 30, 2017 | 234 posts since 2013

Because you can increase the coverage on a regular, individual account by adding POD beneficiaries, either to that account or to another account at the bank or credit union. Beneficiaries don't change the insurance coverage for retirement accounts, which is fixed at $250k.

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Bozo | Mar 30, 2017 | 936 posts since 2011

Charles, I agree that any "uninsured" portion should, theoretically, be afforded a higher rate. But, reality dictates otherwise. I'm somewhat amused that this thread didn't generate much controversy.

Truth be told, I spent ever so much time over the past 13+ years keeping my CDs within insured limits. Finally, with respect to USAA and Patelco, I just took a calculated risk.

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ChasR | Mar 30, 2017 | 234 posts since 2013

So am I. But give it time.
I confess I gave some thought to going over $250K with both the Andrews 3% APY 7-year CD and the Mountain America 2.75% APY 5-year bump CD. I could have gotten NCUA coverage by adding a couple of POD beneficiaries to all my accounts at the cu. But I just couldn't bring myself to do it. Trying to have multiple beneficiaries, in the same proportion, on all my accounts , ends up creating mathematical and specific bequest problems under my will , as well as depriving me of $250k of coverage for a non-POD account.

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Bozo | Mar 31, 2017 | 936 posts since 2011

Charles, the "rubber meets the road" a little later on this year when my PenFed IRA CDs mature, and I have the option to move them to Patelco (or elsewhere). The 2.75% rate at Patelco for a 5-yr is quite tempting. I'm already over my IRA NCUA limit at Patelco, so the issue is "in for a penny, in for a pound". The renewal rate at PenFed is something just north of pathetic. Patelco offers the same "no EWP for withdrawals from IRA CDs for folks over 59 1/2" as does PenFed. I mean, I like PenFed, I really do. But every time you turn around, they acquire another credit union, and drop their rates. See a connection?

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Bozo | Mar 31, 2017 | 936 posts since 2011

PS: The only current viable option to Patelco, somewhat ironically, is another credit union with its roots in telephone company employees, Mountain America. Its 2.75% 5-yr IRA CD is tempting as well. Ken posted a history of Mountain America, from its founding in 1934, on the snapshot.

"MACU was originally formed in 1934 as the Salt Lake Telephone Employees Credit Union in order to serve employees of the Utah-based telephone company. 50 years later, in 1984, the credit union merged with Postal Workers Credit Union and changed its name to Mountain America Credit Union to better reflect its growing membership geography. The credit union is headquartered in West Jordan, Utah."

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Ally6770 | Mar 31, 2017 | 2,378 posts since 2010

I also have 2 IRA's at Pen Fed maturing at the end of the year. I will transfer them to Navy and add them to an existing IRA's that I have at Navy which are still paying substantially more interest that is being offered now. I also have been considerably over the limit at Navy for a few years but I can sleep nights. The Navy CD's expire at the end of 2018 and then I might split them up. I also do not understand why adding additional beneficiaries to the IRA's would not add to the insurance of the IRA's. $250,000 is not a lot to have in several IRA CD's considering that IRA's have been available since the 70's. With this administration I may change my mind. I have confidence in Navy but the way regulations are being disassembled it will be another game and I remember several in this administration saying a few years back the banks are in this situation by their own mistakes let them fail. I may do some rethinking and start transferring some of it out to another institution in a few months.
Yes FDIC-NCUA insurance is relevant. It means safety. It is like health insurance, car insurance and house insurance. They are also relevant when a bank or credit union tries pull a fast one on you or tell you lies or give you problems with your accounts and you know what they are doing or saying is illegal. A quick email to FDIC-NCUA and the problem is settled and FAST.

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Bozo | Apr 1, 2017 | 936 posts since 2011

Ally6770, IRAs are a different breed from after-tax. They are, by definition, "individual", and have but one insurance limit. Exceeding FDIC/NCUA insurance limits (which was the point of my initial post) is an option which should be considered, but with "eyes wide open". I suspect we can all agree that certain financial institutions are so well-connected, or well-established, that the risk of failure is minimal.

Which gets back to the point of my thread. Does there come a point where rate and term trump insurance limits?

You seem to allude to the fact you are over IRA insurance limits at NavyFederal, but can still sleep well at night, even adding more. You sort of illustrate my point.

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Ally6770 | Apr 2, 2017 | 2,378 posts since 2010

Even though I am over the limit I still want the limits we have now. WE DO NEED INSURANCE. It is our choice if we go over and take a chance, but the basic limits that we have now is a must. Just listened to a lecture from a University of Chicago economics professor and he said until they figure out how to get the investment money down to the worker and to infrastructure that our system is very vulnerable.
He said the last 40 years the money has been made in investments for a lucky few and a good living can no longer be made for most people by working.

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hank | Apr 1, 2017 | 44 posts since 2016

yes, it is relevant. It is also very easy in most cases to add up to 5 pods to your account and then get coverage up to 1.25 million

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Bozo | Apr 3, 2017 | 936 posts since 2011

Hank, my apologies, as I was primarily alluding to IRAs. I should have been clearer in my title. As to my Trust, I was advised by the bank the trust governed. When my Mom died, as the successor trustee and sole beneficiary, I was faced with one limit, or I could close the account (and pay the EWP). Or so they told me.
In any event, just a few months to go before the CD matures.

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lou | Apr 8, 2017 | 722 posts since 2010

I am over the insurance threshold at Penfed and Navy Federal with my IRA CDs. Since these are the two largest credit unions in the country and they both seem relatively healthy, I am okay with it.

Opening IRA accounts and transferring money to them are such a hassle, I rather accumulate my money in a few credit unions (assuming the rates are sufficiently attractive), as long as they are not small, fly-by-night credit unions/banks.

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Ally6770 | Apr 8, 2017 | 2,378 posts since 2010

Navy has a great benefit with their IRA's. You can add contributions, mature CD's from there or other places, and even conversions to an existing IRA Cd you have with them during a certain time of the year. When you have higher interest CD with them than is being offered other places and can add to them during this period of low interest CD's it is a benefit that is not matched anyplace else that I know of. An AMAZING BENEFIT FOR THIER CUSTOMERS.
Pen Fed used to have a great benefit. During the first of the year actually the end of Dec you could take any IRA you had with them and get the higher interest they always posted the end of DEC. JUST WITH A PHONE CALL. NO PAPERWORK INVOLVED. In the past this was the best rate offered every year. You go out as long as you wanted. This benefit stopped nearly 10 years ago but if you had any existing CD's with them you could use this benefit one more time. . It is and has been no hassle with these two credit unions. I have already sent in the paperwork for my RMD and my conversion to be made on Dec 20 of this year and already received the confirmation with even the amount after taxes that I chose to have taken out. They list how I chose to have it distributed. As I am getting older and now a widow I do not want my children to worry if I had taken a RMD if something happens to me during the year. I put my conversion in the Roth Savings for a few days and then on Jan 2, I call and have it added to my existing higher rate CD. If rates are higher other places I can have it transferred to that place.

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Beef | Apr 14, 2017 | 2 posts since 2017

Patelco allows you to specificy the % share designated to each beneficiary. As such, you can easily get up to 1,250,000 FDIC coverage by naming 5 beneficiaries, but making one of them the primary beneficiary. For example, designate your spouse as 96% share, and perhaps 1% to each of 4 charities or other living persons. You can also open an individual account, and also another one in a living trust, to give you an extra 500K (or more depending if your living trust has beneficiaries besides yourself). But some banks/CU's don't allow you to specify the percentage to each beneficiary whereby it defaults to an evenly divided allocation.

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Bozo | Apr 14, 2017 | 936 posts since 2011

When I move my after-tax Trust CD from USAA to Patelco in a few months, the garden-variety POD will work just fine. I intend to terminate the trust and distribute.

But thanks for the heads-up.

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