Should I Hold My Cash in an FDIC-Insured Account or an SIPC-Protected Brokerage Account?

Congress established the independent Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC) to safeguard consumers in the event that a bank or brokerage firm fails during lean economic times. The benefits and drawbacks of these insurance protections should be taken into account when choosing between a bank and a brokerage when determining where to store your money.

We take a closer look at SIPC vs. What financial products are covered by the FDIC, how the reimbursement process operates, how they differ, and which kind of insurance is better for holding cash

When you’re not actively investing your money, it’s important to choose a safe and secure place to hold it Two popular options are FDIC-insured accounts and SIPC-protected brokerage accounts. Both offer different levels of protection and benefits, so it’s crucial to understand the key differences before making a decision

FDIC Insurance: Protecting Your Cash in Banks and Savings Associations

The Federal Deposit Insurance Corporation (FDIC) is an independent government agency that insures deposits in banks and savings associations up to certain limits. This means that if your bank or savings association fails, the FDIC will reimburse you for your lost funds, up to the insured amount

Here are some key points about FDIC insurance:

Coverage: Up to $250,000 per depositor, per ownership category (e.g., single accounts, joint accounts, IRAs).
Protection: Covers the principal amount of your deposits and any accrued interest.
Reimbursement process: Automatic. You don’t need to file a claim. The FDIC will contact you directly.
Financial products covered: Checking accounts, savings accounts, money market accounts, certificates of deposit (CDs), and some types of prepaid cards.

Benefits of holding cash in an FDIC-insured account:

Peace of mind: Knowing your money is protected by the government can provide peace of mind, especially during times of economic uncertainty.
Easy access: You can easily access your money at any time, whether through online banking, ATMs, or in person at a branch.
Liquidity: FDIC-insured accounts offer high liquidity, meaning you can easily convert your cash into other assets or use it for spending.

SIPC Protection: Safeguarding Your Securities in Brokerage Accounts

The Securities Investor Protection Corporation (SIPC) is a non-profit organization that protects investors’ securities in the event of a brokerage firm’s failure. If a brokerage firm goes bankrupt, the SIPC works to restore missing cash and securities to investors’ accounts.

Here are some key points about SIPC protection:

Coverage: Up to $500,000 total, including up to $250,000 of cash, for each separate capacity (e.g., individual accounts, joint accounts).
Protection: Covers stocks, bonds, mutual funds, and other types of securities held in brokerage accounts.
Reimbursement process: Requires filing a claim with the SIPC by the specified deadline.
Financial products covered: Stocks, bonds, mutual funds, exchange-traded funds (ETFs), options, and other types of securities held in brokerage accounts.

Benefits of holding cash in an SIPC-protected brokerage account:

Protection against brokerage failure: Your cash and securities are protected if the brokerage firm goes bankrupt.
Access to investment opportunities: Brokerage accounts offer access to a wide range of investment options, including stocks, bonds, and mutual funds.
Potential for higher returns: Investments in brokerage accounts have the potential to generate higher returns than traditional savings accounts.

Choosing the Right Option for You: FDIC vs. SIPC

The best place to hold your cash depends on your individual needs and financial goals. Here are some factors to consider:

Time horizon: If you need to access your cash within the next few days or weeks, an FDIC-insured account is the better choice.
Risk tolerance: If you are risk-averse, an FDIC-insured account offers the most protection for your cash.
Investment goals: If you are looking to invest your cash and potentially earn higher returns, a brokerage account may be a better option.

Here’s a table summarizing the key differences between FDIC and SIPC protection:

Feature	FDIC	SIPC
Coverage amount	Up to $250,000 per depositor, per ownership category	Up to $500,000 total, including up to $250,000 of cash, for each separate capacity
Protection	Covers the principal amount of your deposits and any accrued interest	Covers stocks, bonds, mutual funds, and other types of securities held in brokerage accounts
Reimbursement process	Automatic	Requires filing a claim with the SIPC by the specified deadline
Financial products covered	Checking accounts, savings accounts, money market accounts, CDs, and some prepaid cards	Stocks, bonds, mutual funds, ETFs, options, and other types of securities held in brokerage accounts

Ultimately, the decision of where to hold your cash is a personal one. Carefully consider your individual needs and financial goals before making a choice.

Additional Resources:

FDIC: https://www.fdic.gov/
SIPC: https://www.sipc.org/
MagnifyMoney: https://www.magnifymoney.com/banking/sipc-vs-fdic/
LendingClub: https://www.lendingclub.com/resource-center/personal-savings/fdic-vs-sipc-where-is-it-better-to-hold-cash

How to confirm your brokerage is an SIPC member.

All registered brokers or dealers are required to have SIPC membership, with some exceptions. Similar to FDIC members, SIPC members are required to display their membership in advertisements, online, and if applicable, in person. You can review the list of over 3,500 members to confirm your brokerage firm is insured.

What Is SIPC Insurance?

The Securities Investor Protection Act of 1970 established the Securities Investor Protection Corporation, a nonprofit. Most brokerage firms are required to be SIPC members. When a member firm fails, the SIPC works with trustees appointed by the court to attempt to return securities and other investments to individual investors who have filed a claim, as well as to restore the cash and securities that are in investors’ accounts when the brokerage firm liquidation starts.

Where to Park Cash: Guaranteed 5-6%

FAQ

Do I want my cash held in FDIC or SIPC?

With SIPC and FDIC insurance, one isn’t necessarily better than the other since they both protect you in different ways. If you have bank accounts or brokerage accounts, having both types of coverage can help you feel reassured about the safety of your savings or investments. And neither one costs you anything to have.

Where should I keep my uninvested cash?

Typical options for your uninvested cash include leaving it in your brokerage account, “sweeping” (automatically transferring) it to a bank deposit account as part of a bank sweep program, or sweeping it to a money market mutual fund as part of a money market sweep program.

Where is the best place to park cash?

High-yield savings accounts, CDs, and money market accounts are generally considered low-risk, as they are insured by the FDIC up to $250,000. Treasury securities are backed by the full faith and credit of the U.S. government, making them among the safest investments.