Question: How much does the Federal Deposit Insurance Corp. (FDIC) cover our bank accounts for?

- Gail and Chuck, Colorado Springs

Answer: Basically, Federal Deposit Insurance is a type of insurance that protects your deposits if a bank fails. But not all banks are insured. They are required to meet certain standards to qualify for FDIC coverage.

Here are the nuts and bolts of FDIC coverage.

Accounts that do not pay any interest, like your checking accounts, are 100 percent protected by the FDIC.

All interest-bearing accounts, like your savings, CD, money market and some retirement accounts, are covered for up to $250,000 per account.

So let’s say that you each had a CD and an IRA, a total of four accounts at one bank. With each of those accounts protected up to $250,000,  that would give you a total protection of $1 million.

So if you have more than $250K in a single savings account, it’s a good idea to divide up this money between several banks. That way you don’t have more than $250,000 with any one bank. 

The Dodd-Frank Reform Act, signed by the President on July 21, 2010 made this limit permanent. 

You should also know that FDIC insurance does not protect you against identity theft or unauthorized use of your bank account.

Question: I’ve always thought that Certificates of Deposit (CDs) were safe instruments. How safe are they if a bank was to fail? Also, is there any downside to them?

-      Laura J., Manitou Springs

Answer: Yes, CDs are covered by the Federal Deposit Insurance Corp. So as long as you have your CDs with an FDIC-insured bank and don’t invest above the FDIC limit of $250,000, you are good to go.

If the bank failed, the FDIC would typically transfer your CD to another bank. So you would not lose your money but you may end up getting less. That’s because the new bank does not have to pay you the same interest rate or even stick with the same service terms. It might even decide to close your CD account altogether. 

The CDs do come with some downside. You are locking your money for a certain period of time (a few months or even a few years); otherwise you will be hit with an early withdrawal penalty. Many people automatically dump their emergency savings into CDs without realizing that their money will be tied up for a while. So before investing in a CD, you should think about how accessible this money needs to be and know what the early withdrawal penalty is.

Here is something interesting. A recent Bankrate survey on early withdrawal penalties found that many institutions will dip into your principal if the interest accrued won’t cover the early withdrawal fee.

So, if you choose to buy a longer-term CD, ask yourself if the higher interest rate will make up for the penalty if you decide to bail early. 

Mystified by money and want to improve your financial effectiveness? Denisa Tova CFP®, CDFA, MBA is a Colorado Springs-based Certified Financial Planner. Contact her at DenisaTova.com or email denisa.tova@gazette.com.