FDIC Insured CD's /// What Happens if Bank Goes Under ...?

Question

What kind of nightnmare am I in for if the institution I have my retirement CD in ( FDIC insured bank ) goes down?
I assume there is some waiting period in which I will recieve zero interest? If so typicaly how long is it before the funds are free to be moved again? Anyone ever encounter this situation?

Answer 1

It depends on the circumstances on how the bank goes out of business. The CD may or may not stop earning interest, depending on if there is a long delay. What the FDIC tries to do in a situation like this, is try to "sell" the deposits to other financial institutions quickly. If that happens, then there might be a delay of only a few days. You have the same CD with the same terms, but it is now at a different bank. The other way is that you would get a check for the principal amount, and that could take several months, and you would normally not earn any interest during that time.

Two things to consider:

Many people have retirement accounts that have a high dollar amount. Make sure that what you have invested in one bank is not more than the FDIC insured limit, because the FDIC will only guarantee the amount of your asset up to the FDIC limit. If you actually have more on deposit then the limit, then some of it could be lost.

While some larger CDs have better individual terms, many long term investors are better off having several smaller CDs then just one. For instance, it is better to have ten $10,000 CDs then one $100,000, especially if the 10 CDs are spread over 2-3 financial institutions. If one bank starts having trouble then your entire nest egg isn't at risk. Also, having the money in different CDs, hopefully with dfferent maturation dates, allows you to move money when needed. For instance, a bank that is giving a good rate now may not be in a year. So each time a CD matures you can check bankrates (www.bankrate.com is a good place to do this) and decide if you want to keep the money in the same bank or transfer it to another, higher paying CD. It is more work, but your return will be far superior and your money will be far safer than a situation where you just deposit and forget.

Hope this helps.

Answer 2

You are insured up to $100,000 by the FDIC. yes, I'm sure that there will be some kind of "nightmare" if the bank goes under. Maybe a delay in receiving your money and maybe a period of no interest or low interest. I have no direct experience with bank failures, but I haven't seen any happen in the last 20 years in the cities where I've lived. Maybe you should put your accounts in several banks if you are worried.