Thanks to a federal budget bill signed into law this month, using bank accounts to store large sums for retirement may become a more attractive option.
The legislation contains long-sought reforms to federal deposit insurance, which covers as much as $100,000 per depositor. The biggest change: Starting no later than November, depositors will get as much as $250,000 in insurance coverage for retirement accounts. The amount covered in other accounts will stay at $100,000.
Deposit insurance is needed mainly in the event of a bank failure. In those rare cases, the Federal Deposit Insurance Corp. swoops in and writes checks to every depositor up to the coverage limits. When deposits exceed those limits, any amount over the threshold can be lost.
"We have had some failures in the past where people have had considerable amounts of money in individual retirement accounts," said David Barr, an FDIC spokesman. "They've suffered significant losses. But that coverage will go up to $250,000 per person when we change this rule."
The law also would allow the coverage limits for other types of deposit accounts to increase in $10,000 increments starting in 2010, depending on inflation.
Bankers have been lobbying for higher deposit insurance limits for years. They argue that because these limits have not changed since 1980, inflation has robbed depositors of much of their insurance coverage.
Hiking the limits is particularly important as baby boomers edge closer to retirement, said James Chessen, chief economist for the American Bankers Assn. As people's work lives draw to a close, they often want larger proportions of their assets in safe, liquid investments.
"This additional insurance makes so much sense for today's consumers," said John Stephan, senior vice president of Union Bank of California.
Even before the new rules take effect, depositors can potentially hold millions of dollars in one bank and have it all fully insured by the federal government -- if they are careful and set up their accounts correctly. It's simply a matter of knowing the rules, the FDIC's Barr said.
Here are five things to keep in mind:
* Different types of accounts are insured separately. Individual accounts, joint accounts, trust accounts -- those labeled "payable on death" to specific beneficiaries -- and retirement accounts all warrant separate coverage.
