15

I'm currently carrying a balance of $356,000 in one bank account, which is in excess of the FDIC insured maximum of $250,000. I owe $100,000 in 2014 taxes (which will be paid by April), and the remainder will be used for a potential house down payment and an emergency fund. I do not have a house selected currently.

Is this risky? Should I be concerned? What can I do to ameliorate this risk?

  • 6
    You also should clarify the amount. Carrying a balance of $255k is probably not worth thinking about (the 250k is entirely safe). Carrying $1.5MM is worth thinking about. – Joe Jan 27 '15 at 16:03
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    I agree with Joe - how "in excess" are you? It's only the excess amount you have to care about. – Jon Story Jan 27 '15 at 16:48
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    It's currently at $356,000. And will be spent down under $250,000 within 4 months. – Fixee Jan 27 '15 at 17:18
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    A bank in the united states, or the company US Bank, specifically? – DA. Jan 28 '15 at 4:56
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    @DA The comment above you indicates it is Wells Fargo. – Joe Jan 28 '15 at 21:11
18

First, what's the reason? Why do you have that much in cash at all - are you concerned about market volatility, are you planning to buy a house, do you have tens of millions of dollars and this is your slush fund? Are you a house flipper and this is part of business for you?

If you need the money for short term use - ie, you're buying a house in cash next month - then as long as you're in a sound bank (one of the big national ones, for example) it seems reasonable. You can never predict a crash like 2008, but it seems unlikely that Chase or Citibank will go under in the next few weeks.

If you like to have a cash position, then split the money among multiple banks. Buy a CD at one major bank with some of the amount. My in-laws have a trust which is partially invested in CDs, and they use multiple banks for this purpose to keep their accounts fully insured. Each separate bank you're covered up to 250k, so if you have $150k at Chase and $150k at a local bank, you're covered. (You're also covered in a much larger amount - up to 1MM potentially - if you are married, as you can have a separate account each for $250k and a joint account up to $500k.)

Otherwise, why do you have that much in cash? You should invest it in something that will return more than inflation, at a minimum...


Edit post-clarifications: $350k is around my level of 'Maybe, maybe not'. You're risking $100k on a pretty low risk (assuming this isn't a small local bank, and even those are pretty low still). In order to remove that risk you have to do something active - ie, take 100k somewhere else, open a new bank account, etc. - which isn't exactly the hardest thing in the world, but it does take effort. Is it worth the 0.001% chance (entirely made up) you lose the 100k? That's $10, if you agree with that risk chance. Up to you.

It wouldn't be particularly hard, though, to open an account with an online bank, deposit $100k in there in a 6 month CD, then pay the IRS from your other account and when the 6 month CD expires take the cash back into your active account. Assuming you're not planning on buying a house in the next six months this should be fine, I'd think (and even then you'd still have $150k for the downpayment up front, which is enough to buy a $750k house w/o PMI).

Additionally, as several commenters note: if you can reasonably do so, and your money won't be making significant interest, you might choose to pay your taxes now rather than later. This removes the risk entirely; the likely small interest you earn over 3 months may be similar to the amount you'd spend (mostly of your time, plus possibly actual expenses) moving it to another bank. If you're making 2% or 3% this may not be true, but if you're in a 0.25% account like my accounts are, $100k * 0.25% * 0.25 is $62.50, after all.

  • 1
    About $100k of it will go to 2014 taxes. The rest is emergency fund plus a house downpayment (if I can find a property). – Fixee Jan 27 '15 at 16:32
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    It may be worth investigating whether you can pay that tax early. Once it's no longer your money, it's no longer your worry. – MSalters Jan 27 '15 at 17:38
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    Have to agree with MSalters here: the main reason to delay paying your tax is so you can keep gaining return on that money until you pay it at the last minute. But you're not getting return on that money now, so why not just pay it now? – corsiKa Jan 27 '15 at 17:41
  • I'd agree; the reason I didn't explicitly include that in the answer is it seems obvious, and there could be some reasons for not doing so (like, filing is difficult). Unless this is normal capital gains, this could be from an estate or something else where the tax is not entirely straightforward (and might not be finalized yet). – Joe Jan 27 '15 at 17:45
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    I won't have all documents for a tax filing until a few months from now.... long story. I could preemptively send $100K to the government (as an estimated tax payment, though Jan 15 just passed), but I didn't. I suppose that would have been a safe way to offload the excess cash in a safe way. :) – Fixee Jan 28 '15 at 1:03
7

Yes. Although I imagine the risk is small, you can remove the risk by splitting your money amongst multiple accounts at different banks so that none of the account totals exceed the FDIC Insurance limit. There are several banks or financial institutions that deposit money in multiple banks to double or triple the effective insurance limit (Fidelity has an account like this, for example)

1

If you were married the 250K protection can be expanded by the use of joint and individual accounts. A separate limit also exists for IRA accounts.

With out those options you will have to put some additional money into another banking institution. This could be a bank or credit union. You have to be careful to make sure that any additional accounts have FDIC or NCUA (for Credit Unions) coverage. Some banking institutions try and turn customers to non-covered accounts that are either investment accounts or use a 3rd party to protect them.

You could also use it to invest in US government bonds through Treasury direct. Though for just the few months that you will be in the excess position it probably isn't worth the hassle of treasury direct.

1

Many brokerage accounts for trading stocks are covered under SIPC insurance, which is up to $500,000

You can also have multiple checking and savings accounts with the $250,000 balance split up.

You can also check your bank's capital ratio on the FDIC website, somewhere. The FDIC won't move on them unless it falls under 3% and even then FDIC will force them into receivership and sell them to a bigger bank before they go bust and experience losses of customer deposits.

This is what mostly happened when hundreds of banks failed during the crisis from 2008-2010. There were very isolated events where customers actually lost their cash balances, and that was mostly because those customers had completely uninsured accounts.

As that was the most extreme moment in US and global financial history, you should be able to judge risk with the aforementioned information in mind.

You can stay in a cash balance easily and be fully insured.

-2

Build a trust. I have a trust account under my name and 3 dependents, FDIC confirmed we're good to 1m. Then I have personal accounts for the 4 of us and a corp account, all at the same bank, each also insured.

protected by Chris W. Rea Mar 8 at 11:54

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