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FDIC insurance protects your money (except when ...)

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Protecting retirement savings
But what about retirement accounts? Are they backed by the guarantee of the government? The answer is, sort of.

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Under FDIC rules, bank deposits in self-directed 401(k)s and Keogh plans, Roth IRAs, SEP IRAs and SIMPLE IRAs that are owned by the same person are covered up to a combined total of $250,000.

Limits get a bit complex with employer-directed 401(k), employer-directed Keogh, pension or profit-sharing plans, but in general, money that is allocated to bank deposits in individual employees' accounts is insured up to $100,000. This is referred to by the FDIC as "pass-through" coverage.

It's important to understand that FDIC protection only applies to bank deposits in these retirement accounts. Investments such as stocks, bonds, mutual funds, ETFs and annuities that are sitting in these accounts are not covered.

Who's covered and for how much?

The FDIC offers the Electronic Deposit Insurance Estimator, which tells customers if their accounts at an FDIC-insured institution are within the $100,000 insurance limit.

Not enough cash on hand?
The money paid out to make account holders whole when banks fail comes from the FDIC deposit insurance fund, or DIF. "That fund currently totals $52 billion," says LaJuan Williams-Dickerson, an FDIC spokeswoman. (According to the FDIC Quarterly Banking Profile, the DIF stood at more than $45.2 billion as of June 30, 2008.) Meanwhile, total FDIC-insured deposits ring in at around $4.5 trillion. So, if the DIF stands at a little over 1 percent of the total deposits it covers, how can we be sure it won't run out if there's a cascade of bank failures?

"We don't anticipate that there will be enough bank failures to deplete the $52 billion fund," says Williams-Dickerson.

But even if there was, Nagel says, "The FDIC has a $30 billion line of credit that they could draw on from the Department of the Treasury." And failing that, Nagel says, "the U.S. Congress has said that the FDIC is backed by the full faith and credit of the U.S. government."

So even if the FDIC's funds are overwhelmed by a flood of bank failures, the federal government would be there to make sure depositors got their insured funds back.

What happens if you're not covered?
All this federal protection is moot if your deposits aren't covered by the FDIC. If you have an account that exceeds FDIC limits and the bank goes under, you'll get access to the first $100,000 almost immediately. For the rest, though, you'll have to wait until the failed banks assets are sold off by the FDIC. And if the sale of the bank's assets doesn't yield enough cash to pay off depositors?

"There's no guarantee that they'll get 100 cents on the dollar," says Williams-Dickerson.

In fact, the average return for uninsured deposits is 72 cents on the dollar. And if your bank is caught up in the wealth-destroying subprime mortgage meltdown, you may get much less.

And of course, if you bank at an instituition that is not FDIC-insured, all bets are off. You can be sure a bank is properly insured by doing a search on the FDIC Web site.

Michelle Samaad contributed to this story.'s corrections policy -- Updated: Sept. 16, 2008
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