Investors age 70½ or older are generally familiar with the required minimum distributions (RMDs) they must take from their tax-deferred retirement plans, such as 401(k)s or traditional IRAs. How much you need to withdraw is based on several factors including your account balance and your life expectancy. Often, the larger your retirement account, the larger your withdrawals are. If you’re depositing that money into your bank and have a lot of cash on hand, it is important to be mindful of your asset protection thresholds.
Bank deposits are protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per bank. This means if a bank cannot meet its obligations to its customers, the FDIC steps in to ensure depositors do not lose their money beyond certain limits. While this doesn’t generally happen on a large scale, there are times in our history—2009 through 2012 specifically—that were well outside of the norm, so if you have a considerable amount of cash because of your RMDs, you’ll want to pay particular attention to your FDIC coverage.
FDIC insurance covers checking, savings, and money market accounts, and certificates of deposit (CDs). It does not cover mutual funds, stocks, bonds or other investment products even if purchased through the bank. You also can’t increase your protection by opening multiple accounts at a bank. However, FDIC insurance does cover deposits that have different ownership characteristics. For example, you may have a joint account with your spouse which would provide $250,000 of coverage for each of you (so $500,000 combined). You could each also have individual accounts with $250,000 in coverage. Therefore, you and your spouse could feasibly have $1,000,000 in coverage.
Now, that is also a lot of cash to have sitting around. It may not happen all at once, but couples who are taking RMDs for several years and aren’t spending the money can end up in this position. At this point, if you want to reduce the amount of cash, you may consider purchasing U.S. Treasury securities. Treasurys are backed by the full faith and credit of the United States government, making them one of the safest investments around and are the only asset type considered to be nearly risk-free. When held to maturity, you will get your original investment back. Could the U.S. government fail to a point where a bondholder would not recoup their investment? Yes, but it is unlikely.
If you know you’re not using a portion of your RMDs, you could opt to take your distribution in kind, transferring your stocks or mutual fund shares to a taxable account. You would still owe taxes on the distribution, but your money would remain invested, and it can reset your tax basis for when you do eventually sell the stock.
It’s important to note that investments are not guaranteed or covered by any insurance. You may be informed that your brokerage account is covered by the Securities Investor Protection Corporation (SIPC); however, this protection is only to protect you from a failure of the brokerage firm—not if your investments fall in value.
Ultimately, there are no guarantees in investing. If you are in a position where you have a lot of cash in the bank, pay close attention to how it is titled, and the FDIC coverage you have. If you have questions regarding your cash holdings, the experts at Henssler Financial will be glad to help: