If you have a significant amount of cash, you’ve probably seen the same reassuring numbers repeated by banks, brokers, and fintech companies:
$250,000 of FDIC insurance. $250,000 of SIPC protection.
At first glance, they may sound like two versions of the same thing. They’re not.
FDIC insurance and SIPC protection were created for fundamentally different purposes. And if your objective is to keep your cash safe, FDIC insurance is the protection you want. The distinction matters because some financial companies market SIPC protection as though it provides an equivalent safety net for cash. It doesn’t. The fact that both programs can involve a $250,000 figure does not make them interchangeable.
FDIC insurance protects bank deposits
The Federal Deposit Insurance Corporation, or FDIC, was created in the wake of the Great Depression to protect depositors against bank failures.
FDIC insurance covers eligible deposits held at an insured bank, including checking accounts, savings accounts, money market deposit accounts (but, importantly, not money market funds), and CDs. Coverage is generally up to $250,000 per depositor, per insured bank, per ownership category. In sum, FDIC insurance is deposit insurance.
If you have $200,000 sitting in a savings account at an FDIC-insured bank, you are holding a bank deposit. If the bank fails, your insured deposit is protected within the applicable limits.
If you’re holding cash because you don’t want to take investment risk, that is exactly the kind of protection you are looking for. And if you have more than $250,000 in cash, you can open accounts at several FDIC-insured banks to obtain substantially more coverage.
SIPC protection serves a different purpose
SIPC—the Securities Investor Protection Corporation—exists to protect customers when a SIPC-member brokerage firm fails and customer securities or cash are missing.
SIPC protection generally covers up to $500,000 per customer, including a maximum of $250,000 for cash. But that $250,000 of cash protection is not the same thing as $250,000 of FDIC-insured bank deposits.
Why? Because SIPC is fundamentally about the failure of a securities broker-dealer and the custody of customer assets. SIPC protects cash held by a broker in connection with a customer’s purchase or sale of securities. Specifically, it is meant to protect you against a broker stealing or losing track of your assets. It does not protect your principal. It does not protect against market losses, bad investment advice, or the decline in value of securities. SPIC thus exists to protect against a very specific situation, when your brokerage firm fails and your cash or securities are missing. It offers no protection if your broker makes poor investment decisions and invests your cash unwisely.
A misleading comparison
A broker or fintech may advertise that your account has “$250,000 of SIPC protection” and hope that you confuse that with “$250,000 of FDIC insurance.” The numbers are similar. The protections are not.
Imagine you have $250,000 in cash that you are intentionally holding on the sidelines. You don’t want it exposed to the stock market. You don’t want to speculate with it. You simply want it to remain safe and liquid. Putting that money into an FDIC-insured savings account gives you deposit insurance specifically designed to protect that deposit if the bank fails.
Putting cash into a brokerage account gives you a different form of protection. SIPC is designed to address a brokerage firm’s failure and missing customer assets—not to guarantee the value or safety of cash in the same way that FDIC insurance protects an insured bank deposit. SIPC itself explicitly cautions that its protection is not the same as FDIC protection for cash at an FDIC-insured bank.
That’s an important distinction that can get lost in financial marketing.
If you’re holding cash, use the insurance designed for cash
There is a simple way to think about the difference: SIPC is protection for customers of brokerage firms. FDIC is protection for depositors at banks.
If your goal is to protect cash, why would you choose a protection system designed primarily around brokerage-firm failure when you can hold that cash as a deposit at an FDIC-insured bank?
The answer is especially clear for investors who hold cash precisely because they don’t want to take risk. Cash is different from an investment. You may hold cash for an emergency fund. You may be saving for a home. You may be waiting for an investment opportunity, or to pay taxes. You may simply want a portion of your portfolio outside the market.
Whatever the reason, the purpose of cash is usually safety and liquidity. So the logical place to hold it is in a structure specifically designed to provide those things.
The simplest structure is also the safest
There is another principle worth keeping in mind: know where your money is at all times.
Some fintechs, brokers, and cash-sweep programs sit between you and the underlying banks. Your money may be moved or “swept” into accounts at other institutions, sometimes through complex arrangements involving omnibus accounts, custodial relationships, or intermediary ledgers. You’ll see these words if you read the fine print.
These structures can have legitimate uses, and some may provide FDIC pass-through insurance when properly structured and documented. But the more layers between you and your money, the more important it becomes to understand exactly who holds the account, whose name is on it, how ownership is recorded, and what happens if an intermediary fails.
The cleanest structure is much easier to understand: Your money. Your name. Your bank account. Your FDIC insurance.
When your cash is held directly at an FDIC-insured bank in an account titled in your own name, there is much less ambiguity about where the money is and who owns it. And if you have more cash than the FDIC limit, the solution doesn’t have to involve taking additional risk. You can spread your deposits across multiple FDIC-insured banks and stay within the applicable insurance limits. Max is one such solution that was specifically designed to help you keep money in your own bank accounts, titled directly in your own name, while helping you increase FDIC insurance coverage and earn market-leading rates. Max is not a custodian or intermediary, so you maintain a direct relationship with your banks. In doing so, you can keep cash safe, liquid, and earning as much as possible, with the peace of mind of FDIC insurance.