Is my money safe?

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By Consumers Union on Tuesday, September 16th, 2008

Bank accounts are insured for $250,000 under federal deposit insurance, and most brokerage investments are protected by a private scheme for losses of up to $500,000, but your money might not be protected if you have money on a retailer gift card or this month’s paycheck on a prepaid card.

Your bank deposits are insured. If you have your money in an FDIC insured deposit account, including a checking account, savings account, and certificate of deposit account, you are protected up to $250,000 (with up to $500,000 for a joint account held by two people.) Certain retirement accounts, such as IRA’s and self-directed 401(k) plans, are insured up to $250,000, if they are held in an FDIC insured account. Click here for more details. If you keep your deposits in a credit union, your shares are insured with the same limits as for FDIC insurance, but through a different agency, the National Credit Union Administration. Both the FDIC and NCUA begin making payouts to customers within 3 days from when a bank or credit union closes.

Calculate your coverage. Use these calculators to enter your information (account types and amounts) and see if you’re money is insured.

My money is at an FDIC insured bank.

My money is in a credit union.

Most of your stocks and bonds are protected. Since investing in the stock market is a riskier endeavor, your holdings at a brokerage house are not “insured” in the blanket way that the FDIC insures your bank deposits. If your brokerage firm fails, your cash, stocks and other securities are protected by the Securities Investor Protection Corporation (SIPC), who works to ensure that your securities are returned to you. Note that SIPC is designed to protect you if your securities are missing. If you get bad investment advice or buy stocks that fall in value, SIPC doesn’t cover that loss.

SIPC protects your investments by asking the court to appoint a trustee. First, that trustee arranges for investors to get back all the securities that are registered in their names by arranging a transfer to a different securities brokerage firm. If the accounts aren’t transferred or if the failed brokerage company’s records don’t show who owned what, then the failed firm is liquidated. If the liquidated firm does not have enough to satisfy all the investor claims, SIPC uses its reserve funds to supplement the distribution up to a total of $500,000 per investor with cash reimbursements limited to $100,000 of the total claim.

As for timing, SIPC says that “most customers can expect to receive their property in one to three months. When the records of the brokerage firm are accurate, deliveries of some securities and cash to customers may begin shortly after the trustee receives the completed claim forms from customers, or even earlier if the trustee can transfer customer accounts to another broker-dealer. Delays of several months usually arise when the failed brokerage firm’s records are not accurate. It also is not uncommon for delays to take place when the troubled brokerage firm or its principals were involved in fraud.”
Click here for more detail on what SIPC covers and how it differs from deposit insurance.

Your gift cards, prepaid cards, or payroll cards are a whole different story.

If a retailer issued your gift card, and it files for bankruptcy, you could get stuck in line with the retailer’s creditors for pennies on the dollar after a long delay. Consumers Union thinks retailers should segregate the gift card funds when consumers first purchase the gift cards and hold them in trust to pay for gift card purchases. In September 2008, we asked the Federal Trade Commission to require this.

If you have a gift card issued by a bank that goes under, you might be out of luck. It depends on whether your card is considered an individual account. If so, you will have the same FDIC insurance that protects your other deposit accounts. But if your card is considered part of the bank’s “gift card program”, all cards in the program may be clumped together and the total protection may be only $100,000 for all the cardholders.

Consumers who use a bank-issued prepaid card or a payroll card arranged by their employer to directly deposit their paychecks to the card might or might not be protected. Whether the deposit insurance benefits the card holder depends on how the accounting is set up. Consumers Union has asked the FDIC to issue a regulation to clearly apply deposit insurance for the benefit of individual cardholders to payroll cards, prepaid cards, and bank-issued gift cards.

While we wait for these reforms on gift cards and on prepaid cards that work like bank accounts, Consumers Union advises the following:
• If you are using a prepaid card for direct deposit, think about getting a bank account instead.
• If your employer has arranged for a payroll card, ask your employer to find out from the bank it selected if the payroll card account is insured to you as the individual cardholder, rather than for $100,000 for both you and all the other cardholders.
• If you are holding a retailer gift card or a bank gift card, spend it now.

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