What Happens to Your Bank Savings & IRAs During a Great Depression?
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The fear of another Great Depression looms large when people think about a major economic downturn. Bank failures, plummeting stock markets and loss of savings are concerns that many people have, especially when they think of their hard-earned money in savings accounts or individual retirement accounts (IRAs). While the idea of a Great Depression-style economic collapse can be frightening, today’s financial safeguards offer more protection than those available in the 1930s.
Safeguards like the Federal Deposit Insurance Corporation (FDIC) offer a significant buffer for those worried about losing their bank savings or IRAs in such times.
How Bank Failures Worked in the Past
The Great Depression saw a tidal wave of bank failures. Back in 1929, panicked customers rushed to withdraw their cash as soon as they sensed trouble. The problem was that the more money people took out of their accounts, the less the banks had on hand. This vicious cycle left many banks with little choice but to shut down, leaving countless people with nothing.
Fast forward to today, and we’ve learned from the past. The FDIC, formed in 1933, exists to prevent a repeat of that disastrous scenario. It insures your deposits, meaning even if your bank goes under, you won’t lose everything.
How the FDIC Protects Your Bank Accounts
The FDIC is your safety net. It insures deposits up to $250,000 per depositor, per bank, for each account ownership category—be it a checking account, savings account, or certificate of deposit (CD). So, in the worst-case scenario where your bank fails, you’ll be reimbursed for any loss of deposits up to that limit.
For example, if you have $200,000 in a savings account and $100,000 in a checking account at the same bank, the total of $300,000 would leave $50,000 uninsured. But by spreading your money across multiple banks or ownership categories, you can ensure that you stay fully covered. For joint accounts, the insurance applies per person so that couples can maximize protection for larger sums.
Are IRAs Covered?
When it comes to IRAs, the rules get a bit more complicated. Not all IRA accounts enjoy the same FDIC coverage. If your IRA is in a bank account, such as a savings account, CD, or money market deposit account, it will generally be insured for up to $250,000. This can give peace of mind to those holding cash or stable deposits within their IRAs.
However, things change if your IRA includes investments like stocks, bonds, or mutual funds. These types of accounts are not protected by the FDIC, meaning that if the investments themselves lose value, the loss is entirely yours. Even though you might have opened the IRA at an FDIC-insured bank, the protection doesn’t extend to investment losses.
What Happens If You Have Both an IRA and a Regular Account?
The FDIC covers different ownership categories separately, meaning your IRA and your regular bank accounts could each get the full $250,000 in coverage. For instance, if you have a CD within an IRA worth $200,000 and a savings account with $100,000 in the same bank, each would be insured up to $250,000. This means, in total, you’d be fully covered for the entire $300,000.
Note that for insurance purposes, all of your IRA deposits are combined. So, if you hold multiple IRAs at the same bank, their balances are added together under the FDIC’s $250,000 limit.
What Isn’t Covered by FDIC?
While the FDIC’s coverage is robust for traditional banking products, there are limits. If your retirement accounts are invested in stocks, bonds, or exchange-traded funds, they fall outside the FDIC’s protection. The risk in these accounts lies with the market, and the FDIC cannot protect you from a stock market crash.
You should also note that the FDIC’s insurance doesn’t extend to funds held at non-FDIC-insured institutions or beyond the $250,000 limit per account category. So, for individuals or households with more significant sums, strategic planning is necessary to ensure full protection.
What You Can Do to Stay Safe
If you’re concerned about the security of your savings and retirement funds during an economic downturn, the first thing to do is ensure your accounts are with FDIC-insured banks. This simple step is crucial to protecting your money from bank failures.
Next, consider how you allocate your funds. You can maximize FDIC protection by spreading your deposits across different banks or different ownership categories. Additionally, if you hold IRAs, you might want to evaluate the balance of risk between safer deposits like CDs and riskier investments like stocks.
Last, for those with larger deposits, the use of multiple accounts or banks can help you stay within the insurance limits and protect as much of your savings as possible.