May 2, 2023

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

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The financial system in the United States is complex and at times it can be confusing, especially for new business owners. But mistakes with deposits and transfers can be costly and harm your business. Luckily, that’s why the Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC) exist. Read on to learn what these two entities are and how they protect small business owners.


SIPC vs. FDIC explained 

FDIC and SIPC are two different types of government protections. They were designed to help protect individuals and businesses from institutional failures of banks or brokerages. The FDIC is an agency that insures bank deposits up to $250,000, while the SIPC was established to offer protections for assets in brokerage accounts. We’ll cover the differences in more detail below.

Why are these insurance structures important?

The bottom line is that the existence of the SIPC and FDIC protects consumers and business owners. These insurances give them the confidence to invest their money, or put it in a bank for safe keeping. 

Plus, a small business bank account is a foundational piece to building a company. Not only does having a business-specific bank account offer certain insurance protections, it also makes it easier to keep track of your business finances. Your accounting team can feel confident knowing all business expenses are reflected in that account and can use its record to create a balance sheet, pay off balances on business credit cards. So 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 U.S. Congress passed the Securities Investor Protection Act (SIPA) to regulate the business practices of broker dealers (and other financial institutions). SIPA was responsible for the formation of the SIPC, a nonprofit organization. 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 that comes into play if the SEC (Securities and Exchange Commission) detects that a broker dealer has become insolvent. The importance of these two insurance structures is determined by the financial activity of the business. You don’t select one over the other. Rather, whether the insurance applies to you depends on where your money is.


An example of this would be a small business owner who invests substantial company funds into market equities 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 accounts. 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 or money market mutual funds, for example, the investments are not converted to cash by SIPC. They are simply replaced.


What is SIPC insurance?

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 though: 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 protection includes stocks, bonds, investment accounts, 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. Additionally, “SIPC does not protect against market risk, which is the risk inherent in a fluctuating market. It protects the value of the securities held by the broker-dealer as of the time that a SIPC trustee is appointed,” according to the Financial Industry Regulatory Authority.


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 coverage limit on FDIC claims is $250,000 per depositor, per bank. So you might want to spread your money around to different institutions if you’re holding more than that in cash. You can use the FDIC’s BankFinder tool to determine whether your banking institution is covered under FDIC rules.


The FDIC does not insure stocks, bonds, mutual funds, life insurance policies, annuities, crypto, 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 included in FDIC insurance coverage, 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 or financial institution 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 federally 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.   

In the case of joint accounts (deposit accounts owned by two or more people), FDIC insurance provides coverage amounts for up to $250,000 per joint account holder at each bank.


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.

Head of Content, Ramp

Fiona Lee is the Head of Content at Ramp, overseeing content marketing, customer education, and customer marketing. She brings over a decade of editorial experience developing high-quality B2B content. Prior to Ramp, she led content teams at companies large and small, including Google and Intercom, where she developed a strong interest in small businesses growth topics. Fiona graduated from UC Berkeley with a degree in English.


Is Robinhood FDIC or SIPC?

As of the time this article was written, 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. Read more on Robinhood’s website and always check the specifics of any new investments you take on.

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 insurance 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 were three bank failures in 2020: 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.

Should I use FDIC or SIPC for TD Ameritrade?

Both SIPC and FDIC coverage are advised if your portfolio includes broker-managed deposit accounts and securities investments.

What is the difference between FDIC and NCUA?

The National Credit Union Association, or NCUA, and FDIC both offer fund insurance services in the event that a financial institution fails:

  • The FDIC provides federal insurance for bank accounts. 
  • The NCUA insures credit union accounts.

They both offer identical insurance coverage amount limits.

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