The FDIC is generally well understood: your deposits at FDIC insured banks are insured for up to $250,000, even if the bank runs out of money.
In the investing world, you're insured against brokerage firm bankruptcy by the Securities Investor Protection Corporation (SIPC).
Your Investments Are Not Insured Against Loss
From the Securities and Exchange Commission (SEC):
SIPC covers most types of securities, such as stocks, bonds, and mutual funds. But SIPC does not protect you against losses caused by a decline in the market value of your securities. And it does not provide protection for investment contracts not registered with the SEC.
This is worth repeating: your assets are not insured against losses in market value. You are, however, insured against loss from the bankruptcy of your brokerage.
Which Securities are Insured?
From the SIPC:
SIPC protects stocks, bonds, Treasury securities, certificates of deposit, mutual funds, money market mutual funds and certain other investments as "securities." SIPC does not protect commodity futures contracts (unless held in a special portfolio margining account), or foreign exchange trades, or investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.
What's the Insurance Cap?
From the SIPC:
The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash.
However, if you have mutliple accounts, the limits are separate for some types of accounts.
SIPC protection of customers with multiple accounts is determined by "separate capacity." Each separate capacity is protected up to $500,000 for securities and cash (including a $250,000 limit for cash only). Accounts held in the same capacity are combined for purposes of the SIPC protection limits.
Examples of separate capacities are:
- individual account;
- joint account;
- an account for a corporation;
- an account for a trust created under state law;
- an individual retirement account;
- a Roth individual retirement account;
- an account held by an executor for an estate; and
- an account held by a guardian for a ward or minor.
In the common case, the maximum coverage you might have is $500k each for a Roth IRA, a traditional IRA, a taxable account, and a joint taxable account.
How Often is SIPC Insurance Used?
From the SIPC's 2017 report
In 2017, one new customer protection proceeding was initiated. Over the last ten- year period, the annual average of new cases was 1.3. Since the inception of SIPC, 330 proceedings were commenced under SIPA. These 330 members represent less than one percent of the approximately 39,900 broker- dealers that have been SIPC members during the last forty-seven years. Currently, SIPC has 3,700 members.
Should You Worry About Exceeding SIPC Limits?
The chance of needing SIPC insurance is exceedingly rare. Furthermore, you need a lot of assets to exceed SIPC limits.
On the other hand, we're talking about your life savings. If you can easily transfer some of your assets to another brokerage, you should definitely consider it if you're exceeding your SIPC limit for the account type.
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