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The security or solvency of banks is an issue that came to the forefront after the Great Financial Crisis of 2008. The failure of the Lehman Brothers investment bank and local banks got many people wondering about the security of the banking system in the United States.
Since then hysterical television advertisements and websites have been trying to convince the public that banks are not secure. Many of these advertisements are actually an attempt to sell gold and other precious metals as an investment but they capitalize upon real fears and legitimate concerns.
The truth is that the banking system itself is fairly secure but there are many individual banks that are not secure. Americans money should be safe as long as it is in FDIC insured bank accounts. Accounts that are not FDIC insured including many IRA and 401k accounts may not be secure.
FDIC Insurance and How it Works
The FDIC or Federal Deposit Insurance Corporation is a federal agency that was set up during the Great Depression to insure the security of the banking system. In addition policing banks the FDIC and another agency called the Comptroller of the Currency can takeover failing banks and turn their assets over to other more secure banks.
The purpose of the FDIC is to prevent the total collapse of banks. This can occur when an institution no longer has enough money to cover the withdrawals of depositors. During past financial crises such as the Great Depression bank runs in which large numbers of people tried to take their money out of institutions occurred. Such runs caused some banks to completely collapse.
If a bank is in danger of collapse the FDIC will step in and take it over. The FDIC also insures all checking and saving and some other accounts up to $250,000. That means that if the Hogg Bank of Hazard collapsed the depositors would still be able to get their money.
How to Make Sure Your Bank and Money are Safe
The first and important step you must take is to check and see if your bank accounts are FDIC insured. There are non-FDIC insured banks but they are rare. Unfortunately many accounts including IRAs, 401ks, money market and brokerage accounts offered by many banks are not FDIC insured. If you have any doubts about an account you should move the money out of it and into a secured vehicle.
You can transfer funds out of a retirement account without incurring any additional taxes with a legal mechanism called 1035 exchange. The money will retain its tax deferred status as long as it goes straight into another retirement mechanism such as an annuity. The bank and your investment advisor can help you arrange such an exchange.
If you want to see whether your bank is safe you can check the FDIC’s website. The agency posts a list of failed banks and the actions it is taking about them there. You can check to see if any of your financial institutions are mentioned and move your money if you have any doubts.
Keeping Retirement Funds Safe
Unfortunately most retirement accounts including most IRAs are not insured by the FDIC. There are insured retirement investments such as annuities available. Annuities are insured by both major insurance companies and state governments. You can move funds into one without losing tax-deferment through a 1035 exchange.
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