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Understanding FDIC insurance vs. SIPC protection

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When evaluating bank account options for your startup, how can you tell which one is best for you? You might first take a look at the potential yield you’ll earn on your cash, the monthly fee structure of your account, or the rewards & perks that come baked in.

Or, you might start by trying to understand what happens if your financial service provider goes under. Are your funds protected, and if so, how? Today, most banking for startup options offer either FDIC insurance or SIPC protection - both are effective and serve different types of accounts, but it’s important to know the differences. 

At a high level, FDIC insurance covers cash in a bank account, while SIPC covers securities (and cash intended to purchase securities) in a brokerage account. These types of coverage operate differently, depending on the account you have.

What is FDIC insurance and what does it cover?

The Federal Deposit Insurance Corporation (FDIC) is a federal agency that protects against the loss of cash value in checking and savings accounts held at FDIC-insured banks. For each insured institution, FDIC insurance typically covers up to $250,000 per deposit account, which is based on account ownership. That means that it’s possible to have more than $250,000 in deposits at the same bank and still be fully insured. This can happen if you have multiple ownership capacities (like having both an individual account and a joint account at the same bank). But it’s important to keep in mind that no single account is covered for more than $250,000.

What does FDIC not cover?

FDIC does not insure anything that’s not cash, such as money invested in stocks, bonds, mutual funds, life insurance policies, annuities, municipal securities, or money market funds. Even if these investments were bought from a brokerage affiliated with an insured bank, if it was not a cash deposit, the FDIC does not insure it.

What is SIPC protection and what does it cover?

So then, how are funds that are invested in the market protected? Here is where the SIPC, or the Securities Investor Protection Corporation, comes in. The SIPC is a nonprofit membership corporation that protects customers of SIPC-member broker-dealers. Broker-dealers firms that are members of FINRA who are registered to buy and sell securities on behalf of customers. Customers can have confidence that they will be protected for up to $500,000 of securities (inclusive of up to $250,000 of cash held in a brokerage account for trading purposes) if the broker-dealer that is holding and keeping track of their securities financially fails. SIPC is coverage for brokerage accounts in the event of financial failure of a broker-dealer, whereas FDIC insurance is a type of coverage in the event of a bank failure.

To recap: FDIC vs. SIPC

FDIC insurance covers cash in checking and savings-like accounts, while SIPC protection  covers funds held in securities at broker dealers who are members of SIPC.

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