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Learn the ABCs of FDIC Insurance

Here's how to get a handle on coverage limits.

The following is a transcript of " Money Girl's Quick and Dirty Tips for a Richer Life," a podcast from QuickAndDirtyTips.com. The audio program is available via RSS feed here and at TheStreet.com's podcast home page.

Patti M. e-mailed me with this question:"If you have a CD for $100,000 in an FDIC-insured bank and the bank failed, would the interest accrued also be insured, or would you be down to $100,000?"

The answer is short, but less than sweet. The $100,000 FDIC-insurance limit for deposit accounts applies to savings plus interest. If your $100,000 account were to grow, say, to $110,000 due to interest, the $10,000 that exceeds the limit would be uninsured.

One solution would be to keep accounts at multiple FDIC-insured banks, each with less than $100,000.

Also, keep in mind that it's possible to have more than $100,000 covered at an FDIC-insured bank if you have multiple accounts with different ownership types. The FDIC separately insures accounts with different types of ownership at the same financial institution. The FDIC recognizes eight different ownership types, including single, joint, revocable trust, and irrevocable trust accounts, to name just a few.

For trust accounts, the $100,000 of insurance protection applies for each beneficiary named on the account (not for each account owner). So if you had a trust account with three beneficiaries, it could be insured for up to $300,000.

Special Limits for Retirement Accounts

The FDIC raised the insurance limit in 2006 for certain types of retirement accounts (including IRAs) from $100,000 up to $250,000. So by having accounts with different ownership types, it's easy to see how it's possible to have far more than the basic $100,000 in FDIC coverage at one financial institution if you ever were to need it.

Adrianne in Delaware emailed me with this question:

"I just listened to your podcast about the FDIC. My Roth IRA account will be over the $250,000 limit for FDIC insurance in a few years, including, of course, the compound interest. What should I do? Can I take some money from my current bank, Bank X, and open a new Roth IRA at Bank Y? What do million-dollar celebrities and extremely successful business people do?"

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Only Some Types of Accounts Are Covered

First, determine how much of your IRA is actually invested in bank deposits. FDIC insurance applies to deposits, not investments. Only the portion of your retirement account in bank deposits, such as CDs and money market savings accounts, would be covered by FDIC insurance. FDIC insurance does not apply to money invested in stocks, bonds, mutual funds, life insurance, or annuities, even if you buy them at an FDIC-insured bank.

Most people keep the bulk of their retirement savings in investments that have the potential to earn a higher return than CDs. But let's say, just for the purpose of illustration, that you're retired and you like the predictability of CDs and keep a significant portion of your IRA in them. In this case, the CD investments in your IRA would be insured up to the $250,000 coverage limit, if your IRA were held at an FDIC-insured bank.

Dividing Money Between Banks

But let's say you have more than $250,000 invested in CDs in your IRA and you want the entire amount to be insured. You could open a second IRA at another FDIC-insured bank and move enough of your retirement savings to the new IRA to limit the amount of your CD investments at each bank to less than $250,000. Doing a direct transfer of funds between IRA custodians avoids income taxes, if applicable, and the 10% IRS penalty for early withdrawal, if you're under age 59½.

Again, the $250,000 coverage limit for retirement accounts applies to cash deposits only, such as CDs and money market savings accounts. And, the coverage applies to some, but not all, types of retirement accounts. It applies to all types of IRAs, Keoghs, Section 457 deferred compensation plans for government employees, and employer-sponsored defined-contribution plans (such as 401(k)s).

The same deposit insurance limits used by the FDIC, also apply to credit unions insured by the National Credit Union Association.

As always, everyone's situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.

Cha-ching! That's all for now.

Elizabeth Carlassare is the creator of the

Money Girl podcast. A business and technology writer, investor, and former mortgage loan officer, she has a long-standing passion for helping people make the most of their money. She is the author of the Internet business book, Dotcom Divas, and has been interviewed on more than 60 regional and national radio programs, and featured on C-SPAN Book TV. Elizabeth holds an M.S. from the University of California, Berkeley. She has spoken internationally on the topic of women's entrepreneurship and access to capital. To request a topic or share a money tip, send an email to money@qdnow.com or call 877-6-RICHER.