CDARS Accounts: How To Protect Your Assets From FDIC Insurance Limits
by David Fessler, Advisory Panelist
Friday, July 24, 2009: Issue #1049
As regular readers know, I have a passion for nearly all things hunting and fishing. For the last nine years or so, I’ve been fortunate to be one of just 30 members of one of the oldest and most prestigious hunting and fishing clubs in the United States. Formed in the early 1890s, our 3,800-acre playground in northeast Pennsylvania is teeming with wildlife.
Roughly two-thirds of our membership is retired, many like myself at a relatively young age. Many accumulated their wealth in ways you might expect: lawyers, doctors and investment bankers. Several come from wealthy families, and are responsible for managing substantial levels of savings, in some cases accumulated over several generations.
One of the members recently confided in me that given the spate of recent bank failures and the Federal Deposit Insurance Corporation (FDIC) insurance limits, he was worried about the eight-figure sum that he had parked in certificates of deposit at his bank.
He’s a conservative investor, and invests little of his money in the equity markets, preferring the relative safety of banks. Out of respect for his privacy, I won’t divulge his profession, or the name of his bank, but suffice it to say that it’s on the list of those that received federal TARP funds a few months ago.
At first glance, you might think if his bank should fail, any funds he has over the current per-beneficiary limit of $250,000 could be at risk, especially if those certificates of deposit were all in one account.
It turns out though, my friend has a number of options, some of which he wasn’t familiar with, specifically a CDARS account. Let’s take a look at them…
Insurance Options for Investors
First, there are eight different account ownership categories recognized by the FDIC:
- Single accounts,
- Retirement accounts,
- Joint accounts,
- Revocable trust accounts,
- Irrevocable trust accounts,
- Employee benefit plan accounts,
- Corporation/partnership/unincorporated accounts
- And finally, government accounts.
Follow the link to read more about the requirements for each of these ownership categories.
Another option is to open another account at a different bank. It’s important to note, however, that a separate account at a different branch of the same bank doesn’t qualify.
For high net worth individuals, this can start to get rather cumbersome, especially from a record-keeping standpoint. For instance, an individual with $5 million would have to maintain more than 20 separate accounts in order to allow room for interest payments.
CDARS Accounts – The Best Option For Investors
The best option is the one that most investors have probably never heard of… it’s called a CDARS© account (pronounced “cedars.”) It stands for Certificate of Deposit Account Registry Service.
Not all financial institutions offer CDARS accounts, but nearly 3,000 do. They’re members of the Promontory Interfinancial Network, founded by Eugene Ludwig, former Comptroller of the Currency.
- When a depositor places a large deposit with a network member, that bank uses CDARS to place the funds into certificates of deposit issued by banks in the network. The certificate increments are less than the FDIC maximum to insure that both the principal and interest are protected.
- Other member banks then do the same thing with their customers’ deposits. The whole setup is managed by a sophisticated computer matching system, which calculates the amount of funds that are then exchanged by the member institutions.
- The funds transfer occurs on a dollar for dollar basis. What that means is that the equivalent of the customer’s original deposit comes back to the originating institution.
Banks love it, because those funds are available to them to support local lending programs, thereby building a stronger local banking community.
Once setup, a CDARS account holder can enjoy the safety of full FDIC insurance on balances up to $50 million. In addition, account holders sign one agreement, and receive one monthly statement.
Many investors won’t ever need to take advantage of a CDARS account. But for those that ultimately are faced with the pleasant scenario of a large sum to invest – and want the backing of the full faith and credit of the U.S. government – opening a CDARS account is clearly the way to go. To find out more about CDARS, you can visit their website: http://www.cdars.com
Good investing,
David Fessler
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3 Responses to “CDARS Accounts: How To Protect Your Assets From FDIC Insurance Limits”
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David Fessler is the energy and infrastructure expert for Investment U.
The same thing can be accomplished just buying treasuries. No limits.
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Thanks for again offering quality information in your Investment U email. This is most unlike the other emailed letters I receive daily.
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Thanks for a highly informative article. CDARS is one of several options available to individuals and organizations. As a reader noted, Treasury securities are a second option. A third option, available to certain nonprofit organizations in California, is a collaterialization agreement, under which the bank pledges securities to cover all amounts in excess of FDIC insured limits. As the business manager of a local nonprofit, I used the collaterization agreement with local banks to protect the organization’s deposits.
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