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Staying Safe With Your CD Investments

By sbup Staff
In light of the recent investigation into the Stanford Financial Group, which centers on allegedly fraudulent certificates of deposit (CDs), many are wondering about the safety of their own CD investments.

Most investors are drawn to CDs precisely because of their safety and predictability. But with so many investment scams unfolding these days, how can you be sure of the future of your CDs?

The key reason that CDs are generally regarded as safe investments is because they are insured by the Federal Deposit Insurance Corporation (FDIC), the same entity that insures regular bank deposits. And in an economic world where bank failures are a realistic possibility, FDIC insurance is more important than ever.  

The FDIC now provides $250,000 of insurance per depositor per type of account at FDIC-insured institutions. (Coverage was temporarily raised from $100,000 because of the banking crisis in 2008) There are four types of accounts—single ownership accounts, joint ownership accounts, retirement accounts and revocable trusts. CDs can be held as either single or joint ownership accounts.

There are ways investors can structure account ownership to expand the $250,000 of coverage at a single institution. For example, a married couple with two single ownership accounts and one joint ownership account would have $1 million of FDIC protection.

To protect your CD holdings, it’s crucial that your deposits do not exceed the FDIC coverage. Account types are determined by ownership not by product. For example, single ownership accounts including checking and savings accounts in addition to CDs. If you have $200,000 in a single ownership CD and $60,000 in a single ownership savings account at the same institution, you have exceeded the FDIC coverage by $10,000. If you own brokered CDs, make sure you know the issuing bank. Otherwise you could inadvertently exceed FDIC coverage with other accounts at the same institution.


Don’t forget to include interest earnings when calculating your account holdings. These earnings could push your accounts over the maximum dollar limit for FDIC insurance. For example, if you invest a full $250,000 into one CD, the interest earned would exceed the coverage provided by the FDIC. Siphoning off the interest on a monthly basis can protect you from this risk, however, but beware of the penalties you face if you withdraw money before your CD matures.
The expansion of FDIC coverage is set to expire on December 31, 2009 at which point coverage will return to its original amount, $100,000, unless the Congress extends the higher limit. To be absolutely safe, don’t count on this happening. Structure your CD holdings so that they do not exceed $100,000 in any account right now. If you already have account holdings over $100,000, make a plan to draw down these holdings before New Years’ Day 2010. Avoid purchasing new CDs with maturity dates after December 31, 2009 that will push your holdings over $100,000.

An ounce of prevention can also go a long way to protecting the security of your CD holdings. Keep an eye on the health of your bank(s).’s Ratings Screener allows you to monitor you’re bank’s safety rating. If it looks like your bank is teetering on the edge, consider how you can safely divest. At the very least, move your funds into safer institutions as your CDs mature. If your bank fails and is taken over by a new back, you will be protected by FDIC, but the new bank may not honor the interest rates on your CDs.

Before you purchase a CD, absolutely make sure the bank is FDIC insured. Don't forget that the FDIC covers regular brick-and-mortar banks like Bank of America (Stock Quote: BAC) and Citibank (Stock Quote: C), but also CDs issued by online banks like Discover (Stock Quote: DFS).


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