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Student Question of the Week: FDIC versus SIPC

Student Question from Leslie G
Course:  Fundamentals of Financial Planning

Student Question:

I thought that all investments were SIPC covered; however, does that change for an IRA invested in a money market fund or CDs?  Thanks!


Instructor Response:

Hi Leslie!

The purpose of the FDIC is solely to provide consumer confidence in our nation’s banking system.  FDIC coverage applies only to traditional bank products purchased from a federally charted bank.  Traditional bank products include checking, savings, money market deposit accounts and CD purchases.  A bank customer can open an IRA with her federally chartered bank, purchase CDs for the IRA from the bank, and enjoy FDIC coverage on the CDs owned within the IRA (within the $250,000 limit).

However, if she purchases non-traditional bank products such as mutual funds, then she has no FDIC coverage.  This is true even if she purchases the mutual funds from a financial advisor sitting in the bank’s branch.  The financial advisor is an employee of the bank’s brokerage affiliate and not the bank.

Be very careful not to confuse “money market deposit account” ( a traditional bank product insured by the FDIC) with “money market fund,” which is a mutual fund, NOT a traditional bank product.  The mutual fund is not covered by the FDIC.

Let me share a quick insight on SIPC as well. SIPC does not insure against market losses. SIPC reimburses investors who lose money as a result of a broker’s insolvency or certain types of unauthorized trading conducted by the broker without the client’s consent. Investors who lost money as a result of the Enron scandal were not reimbursed by SIPC, for example.

I hope that helps!

Bruce