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Community Bank Deposit Account Options Questions & Answers

Washington, D.C. (Sept. 25, 2008)—The Independent Community Bankers of America (ICBA) wants to reassure community bank customers about the safety of their deposits in accounts with community banks. Here are answers to some questions community bank customers are asking about their accounts:

Q: I’ve heard lately that money market funds are in crisis. I have deposits in a money market account through my community bank. Is my money at risk?

A: There’s an important difference between bank deposits which are insured by the FDIC and non-bank money market funds. Worry on the part of consumers can be attributed to the confusion between money market mutual funds, which have been the subject of recent headlines, and money market deposit accounts, which are the ones you probably own.

Key differences:

  • Money Market Mutual Funds are mutual funds which hold short-term debt investments such as low-risk government securities, certificates of deposit and short-term debt issued by public companies (“commercial paper”). These shares are typically sold to investors by brokerage houses and mutual fund companies, and just like any fund that is not a bank deposit, they are not FDIC-insured and there is the potential (though very low) for shareholders of these accounts to lose money.

    Nevertheless, under the Treasury Department’s recently announced guarantee plan, amounts shareholders had in money market mutual funds prior to close of business on Sept. 19, 2008 will be insured for a period up to one year, if the mutual fund signs up and pays a fee to be covered.

  • Money Market Deposit Accounts are widely available interest-bearing bank accounts. They are essentially savings accounts with higher interest rates. Depositors owning these very safe accounts are FDIC-insured to $100,000, or $250,000 for some retirement accounts.

Q: Isn’t the best course of action right now to withdraw my money and put it “under the mattress”?

A: Absolutely not. In fact, that is the surest way to allow inflation to erode your spending power. Think about it this way—your great-grandfather could have bought an entire meal for a dollar a 100 years ago, but if he’d stuffed that dollar under the mattress for you to find today, you could barely buy a candy bar with it now.

More important, if you keep your money in a bank savings or checking account, the FDIC backs it with insurance, and no one has ever lost money that’s covered by deposit insurance.

Q: Then what should I do with my money? I don’t really like a lot of risk.

A: Fortunately, there are plenty of safe alternative deposit products available at your local community bank in addition to money market deposit accounts, which, again, are quite safe. You should talk with your community banker, but here are some of the most popular:

Certificates of Deposit (CD) are FDIC-insured deposit products with attractive interest rates. Sometimes called time deposits, a CD has to be held and the money cannot be withdrawn until its maturity date (typically three months, six months, or one-to-five years). Depending on the account, you could be assessed a penalty fee for withdrawing funds early, but some banks offer CDs that let you withdraw some of the funds before maturity without a penalty fee. You should check with your community bank, but bank CDs are insured by the FDIC.

Individual Retirement Accounts (IRAs) are tax-advantaged accounts for retirement savings. In the majority of cases, banks offer two-types of IRAs: traditional and Roth. Contributions to traditional IRAs are made with pre-tax assets, but at retirement, withdrawals are taxed as income. Conversely, all Roth IRA contributions are made with after-tax assets; however, withdrawals are usually tax-free. These accounts are FDIC-insured. And, after recent changes in federal law, IRAs are usually insured for up to $250,000 instead of the traditional $100,000 deposit insurance coverage.

Savings Accounts are among the traditional deposit bank accounts. These deposits are FDIC-insured and carry virtually no risk. Because the risks are low, the interest rates you can earn on these accounts also tend to be comparatively low. Unlike a regular checking account, there are monthly restrictions on the number of times you can draw funds from the account, and sometimes you will be required to keep a minimum balance. But savings accounts are an important way to keep funds safe and secure, covered by deposit insurance and relatively easy to access.

U.S. Treasury Securities are the collective array of government bonds, from Treasury bills to U.S. savings bonds. They are regarded as the safest of all investments because they are backed by the U.S. government. In addition, earnings on Treasury securities are exempt from state and local taxes. But they are not covered by deposit insurance.

Q: My spouse and I are combining our money into an account under my name only. Will the FDIC insure each of us for the full $100,000?

A: No. The FDIC insures deposits up to $100,000 per depositor and $250,000 for certain retirement accounts. If you have more than $100,000 at a community bank, however, you can still be fully insured if your accounts meet certain requirements. For example, accounts owned by a single person are separately insured from joint accounts or retirement accounts owned by that person. In this case, you can each have $100,000 insured in separate accounts with one name each, and have another $200,000 insured in an account that bears both your names. The FDIC has information on its Web site about how deposit insurance coverage works. Or better yet, talk to your local community banker. And remember, no one has ever lost a penny of FDIC-insured deposits held in community banks.