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Could the debt-ceiling debate endanger my deposits?

October 10, 2013

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

FDIC insurance

Q: I'm concerned that the government's debt-ceiling standoff will destabilize the banking system. Would I be wise to take my money out of the bank and stop my pay from being direct-deposited until there is a solution?

A: Your concern is understandable, but pulling out of the banking system seems a little drastic. Keep in mind that the FDIC insurance that protects your bank deposits is funded by regular assessments to the participating banks. Of course, part of the power of FDIC insurance is that it has the implicit backing of the U.S. government should the insurance fund get caught short, but the FDIC maintains a 2 percent reserve balance to cushion against the possibility of that happening.

One of the questions you have to ask yourself is what you would do with the money if you took it out of the bank. Just about every type of investment may be vulnerable to market disruptions if the U.S. government defaults, so it's hard to see where a safe harbor would be. You could just keep the money in your possession, but that would involve taking a huge risk. You would have no recourse if that money were to be stolen or damaged in a fire.

Besides the protection of FDIC insurance, another benefit of savings accounts or other bank deposits is the interest you earn on your money. CD, savings and money market rates may not be very high right now, but even a little interest is better than nothing.

So, as nerve-wracking as it may be, the safest thing is probably just waiting out the debt-ceiling standoff by keeping your money in the bank. Make sure your money is fully protected by FDIC insurance by keeping your deposits within the insurance limit. That limit is $250,000 per depositor per bank. For the purposes of determining what falls within that limit, the FDIC combines the balances of all your accounts at a given bank. So, for example, if you had $400,000 split evenly into two $200,000 savings accounts at one bank, only $250,000 would be insured, leaving $150,000 of your money vulnerable. However, if you put those two savings accounts at different banks, your entire amount would be covered.

You can also increase your coverage amount at a single bank if you have a joint account with your spouse (you each would be entitled to $250,000 worth of coverage, so effectively the limit on joint accounts is $500,000). Also, money in an IRA is counted separately from your taxable assets, so that's another way to get more coverage.

All in all, FDIC insurance is a good deal for consumers -- and the debt-ceiling standoff should do nothing to diminish that.

Got a financial question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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