October 28, 2022

FDIC vs SIPC: which insurance provides the best coverage for you?


The financial system in the United States is complex and can be confusing. Mistakes with deposits and transfers can lead to significant losses. That’s why the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC) exist. In this article, we’ll explain what these two entities are and how they protect small business owners.


SIPC and FDIC explained 

A big part of a healthy financial culture is having confidence that deposits into your small business bank account are protected. The FDIC insures them up to $250,000. The SIPC was established to offer similar protections for brokerage accounts, but it doesn’t work the same way that FDIC insurance works. We’ll cover that in more detail below.

Why are these insurance structures important?

A small business bank account is a foundational piece to building a company. It’s used by the accounting department to create a balance sheet, pay off balances on business credit cards, and establish a credit rating with business credit reporting bureaus. Insuring deposits into business bank accounts is one way to ensure accuracy in those functions.


Many small business owners invest their profits with brokerage firms. In 1970, the US Congress passed the Securities Investor Protection Act (SIPA) to regulate the business practices of broker dealers. SIPA was responsible for the formation of the SIPC. Between that and the FDIC, small business owners can have a higher degree of confidence in their financial transactions.     

Which insurance structure is best for startups?

SIPC vs FDIC is not a choice like selecting corporate cards over virtual credit cards for business. FDIC insurance protects bank deposits. SIPC is a recovery mechanism if a broker dealer becomes insolvent. The importance of these two insurance structures is determined by the financial activity of the business. You can’t select one over the other.


An example of this would be a small business owner who invests substantial company funds into market equities and insurance products sold by a broker dealer. Financial planning and analysis may determine that’s a good strategy for increasing profitability, but the FDIC protection on that money disappears when it leaves the business bank account.  


Taking that one step further, SIPC is not designed to protect your investment. It’s insurance that your investments will be recovered if the broker dealer fails. The value of the investment is not protected, so market gains and losses still apply. If you’re trying to track business expenses on equity sales, the investments are not converted to cash by SIPC. They are replaced.


What is SIPC insurance?

We’ll start with SIPC insurance because FDIC is a familiar term for most deposit holders in the United States. SIPC is specific to brokerage account investments, so it doesn’t apply to every small business, only those that are investing their profits in market equities, bonds, or broker-specific products like annuities, cash-value insurance, and mutual funds.


Broker dealers receive funds from investors using an invoice processing system that is comparable to what your company uses. That invoice creates a record of the transaction that should be archived by accounting software small business owners use to keep track of income and expenses. The broker dealer then invests that money on behalf of the company.  


How does SIPC work? 

The arrangement between a broker dealer and a small business owner can run smoothly if the brokerage fund stays solvent, and the investor continues to maintain their account. It’s only in the event of insolvency that SIPC insurance comes into play. If the brokerage fund becomes insolvent, SIPC insurance will replace cash and securities up to $500,000 ($250,000 cash).


There’s a caveat to this. The broker dealer must be an SIPC member for the investor to make a claim. If you’re looking for business finance tips, begin with checking on the SIPC status of a brokerage firm before you make your first deposit with them. Without that, you’ll be adding your insolvency losses to monthly expense reports with no hope of any recourse.      


What financial bodies does SIPC insurance cover?  

SIPC protects stocks, bonds, Treasury securities, certificates of deposit, mutual funds, and money market funds. They do not protect commodity futures contracts, foreign exchange trades (FOREX), or fixed annuity contracts that are not registered with the SEC. This protection is only valid if the brokerage firm is a member in good standing with the SIPC.


What is FDIC insurance? 

The FDIC is a federal agency established to protect deposit accounts in FDIC-insured banks. This includes small business checking accounts, savings accounts, and certain retirement accounts. The limit on FDIC claims is $250,000, so you might want to spread your money around to different institutions if you’re holding more than that in cash.


The FDIC does not insure stocks, bonds, mutual funds, life insurance policies, annuities, municipal securities, or money market funds. Those fall under SIPC if the brokerage firm that sold them to you is an SIPC member. IRAs and self-directed defined contribution plans are covered by FDIC insurance, but only if they’re held at member banks.


How does FDIC work?

The Federal Deposit Insurance Corporation was established by the Banking Act of 1933 as a response to banking failures during the Great Depression, when millions of Americans lost their life savings. To prevent that from happening again, the Federal government created the FDIC to offer insurance and get consumers to trust their banks once again. It has three functions:


1. Insuring deposits in checking and savings accounts

2. Overseeing and examining FDIC member banks

3. Stepping in if a bank fails


In the event of a bank failure, the FDIC adds up all depositor accounts held by the same party at the federally insured bank and pays out a limit of up to $250,000. To prevent that from happening, they have strict guidelines in place for member banks that include maintaining a specific reserve and adhering to banking and finance laws.   


What financial bodies does FDIC insurance cover? 

Most banks are federal insured, meaning they are covered under the FDIC. The types of accounts that are covered include negotiable orders of withdrawal (NOW) accounts, money market deposit accounts, checking and savings accounts, and certificates of deposit (CD). FDIC covers the principal and interest on all these up to $250,000.   


Ramp uses only FDIC-insured providers. To learn more about this, or if you have questions about a pre-paid credit card for business to offset any overages on FDIC limits, contact us today. Our team members are standing by to help you make the right financial choices in this area

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Is Robinhood FDIC or SIPC?

Robinhood Financial LLC is a member of SIPC. Retail investors on the platform are protected for up to $500,000 in held securities and $250,000 in cash holdings. Cash holdings in a Robinhood spending account are also eligible for FDIC insurance up to $250,000.

Is it safe to keep more than $500,000 in a brokerage account?

The SIPC only protects up to $500,000 of equities and cash invested in a brokerage account. If you have more than that to invest, it’s safer to open a second account at a different broker dealer to lock in SIPC coverage for those extra funds.

How often have FDIC and SIPC been used?

Banks don’t fail very often, and no depositor has lost funds at a federally insured bank since the FDIC was established in 1933. There have been three bank failures since the pandemic (First State Bank, First City Bank of Florida, and Almena State Bank). SIPC has been used more frequently. There have been 324 brokerage firm failures since it was established in 1970.

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