Forum Thread
USA TODAY Discounts, Deals and Coupon Codes

Are Roth IRAs FDIC-insured?

Storyteller 1,188 414 February 18, 2011 at 02:55 PM in Finance More USA TODAY Deals
Deal
Score
+1
15,628 Views

Thread Details

I'm thinking of finally opening a Roth IRA and doing a last-minute dash to max out the 2010 contribution before the 4/15 deadline. However, I'm not so clear on the FDIC coverage...

My banker over at Wells Fargo keeps saying that Roth accounts with online brokers aren't FDIC-insured (I'm thinking of opening an account with TradeKing or Vanguard) and that I should open an account with my bank instead (but I'd rather avoid paying a $30 annual fee and $20 per trade). However, this article [usatoday.com] says that even if you have an IRA with your bank, you're kind of screwed:
Quote :
To qualify for federal insurance, your IRA must be invested in bank deposits, such as CDs, Nagle says. The FDIC doesn't insure mutual funds, stocks, bonds or annuities, even if you bought them through your bank.
In other words, is it true that any Roth IRA that has stocks or mutual funds is not safe? Confused If that's the case, doesn't it turn into a sort of long-term Russian roulette? I don't plan to withdraw my IRA contributions until 2046, so it seems like a guessing game - picking a broker/bank that won't go bankrupt in the next 35 years... Roll Eyes (Sarcastic)

19 Comments

1 2

Sign up for a Slickdeals account to remove this ad.

#2
Quote from Night_Runner View Post :
I'm thinking of finally opening a Roth IRA and doing a last-minute dash to max out the 2010 contribution before the 4/15 deadline. However, I'm not so clear on the FDIC coverage...

My banker over at Wells Fargo keeps saying that Roth accounts with online brokers aren't FDIC-insured (I'm thinking of opening an account with TradeKing or Vanguard) and that I should open an account with my bank instead (but I'd rather avoid paying a $30 annual fee and $20 per trade). However, this article [usatoday.com] says that even if you have an IRA with your bank, you're kind of screwed:


In other words, is it true that any Roth IRA that has stocks or mutual funds is not safe? Confused If that's the case, doesn't it turn into a sort of long-term Russian roulette? I don't plan to withdraw my IRA contributions until 2046, so it seems like a guessing game - picking a broker/bank that won't go bankrupt in the next 35 years... Roll Eyes (Sarcastic)
Stocks, mutual funds, index funds, options are not FDIC insured. Your taking a risk when you invest and speculating that your investment will be worth more in the future. Why would the government bail you out if your investment goes sorer (excluding the too big to fail BS Stick Out Tongue)? It doesn't matter if you hold these equities in an IRA, brokerage account, 401k, etc. Roth IRA is just an account that can be tied to a brokerage account (stocks, mutuals, etc.).

What is FDIC insured are deposits and cd's held in your IRA ($250k?).

I believe brokerage accounts are insured up to $500k in the event the brokerage goes under but doesn't cover fraud ie pyramid scheme. I think it is more for someone hacking your account and covering your position if the brokerage goes belly up? Not sure.

Far as what to invest in, that is not an easy question. No one really has the best answer. Just remember, holding paper currency is an investment as well. Holding only paper currency, you are speculating that $100 today is going to be able to purchase the same amount of stuff in the future (won't). You have to do something with that paper currency because inflation will kill it. So, either trade your paper currency for fancy stock certificates, gold, CD's, property, etc. that may or may not have interest payments to help defeat inflation and may or may not increase in value.

But yeah, I'm 25 and don't plan on withdrawing my IRA contributions until 2050. I may withdraw it to take advantage of the tax incentive for first time home buyers in the future ($10,000 in gains tax free + contributions are always tax free when withdrawing). I invest in index funds, mutual funds, and a mix of companies that I believe will be around in the future as well as a few speculative plays.
Reply Helpful Comment? 0 0
Last edited by specialmoose February 18, 2011 at 04:04 PM
Joined Oct 2005
awake
1,188 Posts
414 Reputation
Original Poster
#3
Quote from specialmoose View Post :
Far as what to invest in, that is not an easy question. No one really has the best answer. Just remember, holding paper currency is an investment as well.
I know that. laugh out loud I'm just concerned that if I max out my contribution every year, do the right thing and invest properly, yada yada yada, and then when I'm 58 the brokerage goes bankrupt and it'll take all my money with it. Roll Eyes (Sarcastic) I mean, 40 years ago, who could have thought that Salomon Brothers would go broke? Or Lehman brothers? Or all those other banks and seemingly reputable financial institutions?..
Reply Helpful Comment? 0 0
  • If my post helped you and you want to return the favor, send me a PM! woot
  • If you have an Amazon account and 30 seconds, I have an MCR cap with your name on it. Cool PM me for details.
#4
Quote from Night_Runner View Post :
I know that. laugh out loud I'm just concerned that if I max out my contribution every year, do the right thing and invest properly, yada yada yada, and then when I'm 58 the brokerage goes bankrupt and it'll take all my money with it. Roll Eyes (Sarcastic) I mean, 40 years ago, who could have thought that Salomon Brothers would go broke? Or Lehman brothers? Or all those other banks and seemingly reputable financial institutions?..
Yeah, 2008 made me rethink everything investing. I now look at my portfolio least every day or every other day. I'm long term on some stuff but I'm never going to do the whole set it and forget it like I did previously.

Buy and hold is dead far as I am concerned. Should be buy and constantly check check check to make sure some fat cat isn't screwing you six ways from Sunday.
Reply Helpful Comment? 0 0
Last edited by specialmoose February 18, 2011 at 08:00 PM
Joined Oct 2005
awake
1,188 Posts
414 Reputation
Original Poster
#5
Quote from specialmoose View Post :
I'm long term on some stuff but I'm never going to do the whole set it and forget it like I did previously.
Depends on the company. As corny as Warren Buffett can be, he has a good point about reliable companies with "moats" - companies like Coca-Cola, Gillette, or utilities companies will never go out of business. Their value can dip every once in a while, but it always goes back up.

In any case, my chief concern is about the vulnerability of all IRAs everywhere. Unless you've got all your money in CDs, you can be screwed by your bank's/broker's CEO, even if you do everything right... Frown
Reply Helpful Comment? 0 0
#6
Reply Helpful Comment? 0 0
#7
Another thing to keep in mind. We are currently $14 TRILLION in debt. All the money that goes into an IRA has already been taxed. However, only takes a piece of paper (new law) to eliminate that and add a tax to it when you withdraw in retirement. Pretty scary.

Doubt that will happen but last few years, my mind has been blown more than a few times.
Reply Helpful Comment? 0 0
Joined Oct 2005
awake
1,188 Posts
414 Reputation
Original Poster
#8
Quote from specialmoose View Post :
Another thing to keep in mind. We are currently $14 TRILLION in debt. All the money that goes into an IRA has already been taxed. However, only takes a piece of paper (new law) to eliminate that and add a tax to it when you withdraw in retirement. Pretty scary.

Doubt that will happen but last few years, my mind has been blown more than a few times.
It doesn't work like that. This is a democracy (no matter how crooked it really is). The vast majority of congressmen want to get reelected. In order to do do that, they must avoid pissing off their constituents. People bitch and moan about even the most minute tax increases - if some moron actually proposes a bill that would double-tax IRA contributions, he will get a) impeached and b) lynched by the angry yuppie crowds. laugh out loud


Quote from sd99 View Post :
No need to worry:
http://www.mymoneyblog.com/e-trad...rance.html
Whew... Just what I was looking for. Thanks! Smilie
Reply Helpful Comment? 0 0
Last edited by Storyteller February 19, 2011 at 10:00 PM

Sign up for a Slickdeals account to remove this ad.

#9
Quote from Night_Runner View Post :
It doesn't work like that. This is a democracy (no matter how crooked it really is). The vast majority of congressmen want to get reelected. In order to do do that, they must avoid pissing off their constituents. People bitch and moan about even the most minute tax increases - if some moron actually proposes a bill that would double-tax IRA contributions, he will get a) impeached and b) lynched by the angry yuppie crowds. laugh out loud
You have more faith in the system than I do.
Reply Helpful Comment? 0 0
Last edited by specialmoose February 20, 2011 at 12:22 PM
Joined Oct 2005
awake
1,188 Posts
414 Reputation
Original Poster
#10
It's not faith - merely a realistic understanding of political realities. (Got a degree in political science and all that...) Sure, you can screw over some people, as long as they're in minority and are quantifiably different (gays, blacks, Japanese-Americans in WW2) - but it's both impossible and stupid to eliminate the savings of the people who hold considerable power and finance your election campaigns. Yay for being a straight white male... Roll Eyes (Sarcastic)
Reply Helpful Comment? 0 0
Last edited by Storyteller February 20, 2011 at 07:58 AM
#11
Quote from Night_Runner View Post :
It's not faith - merely a realistic understanding of political realities. (Got a degree in political science and all that...) Sure, you can screw over some people, as long as they're in minority and are quantifiably different (gays, blacks, Japanese-Americans in WW2) - but it's both impossible and stupid to eliminate the savings of the people who hold considerable power and finance your election campaigns. Yay for being a straight white male... Roll Eyes (Sarcastic)
Roth IRA has only been around since 1997 (Traditional IRA since 1974). So, a large chunk of those who will take advantage of the tax free distributions I believe hasn't even been seen yet. 1997 until 2002, the max yearly contribution was $2,000. 2002 to 2005 was $3,000 and in 2008 was $5,000. So, if I did my math right we are talking roughly $50k in contributions over 13 years or so. Even with a 100% or even 200% return, isn't much to demand changes in how taxes are dealt with. Now, person's like you and I who are going to have 40+ years of tax free sheltering of our money... you see where I start to get skeptical?

Also, I would bet cold hard cash that the average American is not taking advantage of a Roth or even knows what one is. Hell, contributing to a 401(k) for most is bad enough. Seeing how Americans are debt hungry and rather blow money on frivolous objects instead of planning for the future, those who actually save and especially those who invest in Roth IRA's are a minority. How many people do you know max out their Roth, max out their employer retirement account (401(k), SIMPLE, etc.), have emergency savings, invest in dividends, and are liquid? Pretty small minority. Spend a billion and you can get all the votes you want.

Also, you have social security printing out IOU's. When a large chunk of the baby boomers start to retire, I have no idea where the government plans on getting the money from. Actually, I do. Tax everyone and print green backs like there is no tomorrow. Social security has a wage limit at $100k. I definitely see that being increased.


edit: christ, I should start a blog Stick Out Tongue
Reply Helpful Comment? 0 0
Joined Oct 2005
awake
1,188 Posts
414 Reputation
Original Poster
#12
Quote from specialmoose View Post :
Roth IRA has only been around since 1997 (Traditional IRA since 1974). So, a large chunk of those who will take advantage of the tax free distributions I believe hasn't even been seen yet. 1997 until 2002, the max yearly contribution was $2,000. 2002 to 2005 was $3,000 and in 2008 was $5,000. So, if I did my math right we are talking roughly $50k in contributions over 13 years or so. Even with a 100% or even 200% return, isn't much to demand changes in how taxes are dealt with. Now, person's like you and I who are going to have 40+ years of tax free sheltering of our money... you see where I start to get skeptical?
I see where you get skeptical, but I am skeptical about your skepticism. Wink Cite three instances in which the U.S. government broke its financial obligations (refused to pay for a matured bond, etc.). Even in the unlikely scenario that it does happen, the courts will overrule it - it'll take just one angry federal judge to declare this double taxation against the rules.

Quote :
How many people do you know max out their Roth, max out their employer retirement account (401(k), SIMPLE, etc.), have emergency savings, invest in dividends, and are liquid? Pretty small minority. Spend a billion and you can get all the votes you want.
American politics is decided by more than mere numbers. Money and power can make a single individual more influential than a thousand of his peers. Or are you seriously suggesting that the poorest 2% of Americans are just as powerful as the richest 2%? Confused The rich and affluent (and that includes middle and upper-middle class) like their tax breaks, credits and tax shelters, no matter how small they may be. Yes, Roth IRA is a relatively young program, but messing with it is just not worth the political capital. You'd get a lot more results (not to mention Schadenfraude) if you take money from the poor - say, by defunding the Planned Parenthood. (Which the House Republicans are currently doing, by the way). It's a whole lot easier this way...
Quote :
Also, you have social security printing out IOU's. When a large chunk of the baby boomers start to retire, I have no idea where the government plans on getting the money from. Actually, I do. Tax everyone and print green backs like there is no tomorrow. Social security has a wage limit at $100k. I definitely see that being increased.
Same here. That's why I'm starting to save for my retirement early - I don't expect the SS money to be there when I get old. (By then, the eligibility age will probably be in mid-70s.)

Quote :
edit: christ, I should start a blog Stick Out Tongue
Same here, but I value my time and privacy too much. :p
Reply Helpful Comment? 0 0
#13
This is a great thread. OP, your original question is really good..never really thought of it, but I am glad you brought it up.
Reply Helpful Comment? 0 0
#14
Quote from Night_Runner View Post :
I see where you get skeptical, but I am skeptical about your skepticism. Wink Cite three instances in which the U.S. government broke its financial obligations (refused to pay for a matured bond, etc.). Even in the unlikely scenario that it does happen, the courts will overrule it - it'll take just one angry federal judge to declare this double taxation against the rules.
I can't think of anytime the federal government refused to pay for their obligations. But, I can't think of any other time in history when the Federal Reserve was printing money like there was no tomorrow. Or, any other time where the average American was so upside down in debt. Americans by the millions were using their home as their own personal bank account. Kind of easy to pay for stuff with money you just create out of thin air.

Like I said, we will start to see the real mess when all the baby boomers start to retire. They will demand their due and the federal government will have to find a way to pay it. I'm betting with dollars worth next to nothing or tax everyone to hell and back.

Quote from Night_Runner View Post :
American politics is decided by more than mere numbers. Money and power can make a single individual more influential than a thousand of his peers. Or are you seriously suggesting that the poorest 2% of Americans are just as powerful as the richest 2%? Confused The rich and affluent (and that includes middle and upper-middle class) like their tax breaks, credits and tax shelters, no matter how small they may be. Yes, Roth IRA is a relatively young program, but messing with it is just not worth the political capital. You'd get a lot more results (not to mention Schadenfraude) if you take money from the poor - say, by defunding the Planned Parenthood. (Which the House Republicans are currently doing, by the way). It's a whole lot easier this way...
I think you misunderstood who I was referring to that will get hit the shaft. The rich will be fine. The poor will be fine due to federal programs and subsidies. The middle class will get the shaft. People are sheep. And like I said, the average American most likely doesn't have a Roth or any significant amount in one. Don't think it will never happen? Look at the health reform that is going on.

Quote from Night_Runner View Post :
Same here. That's why I'm starting to save for my retirement early - I don't expect the SS money to be there when I get old. (By then, the eligibility age will probably be in mid-70s.)
I just wish I could opt out.


I'm skeptical because we are $14 trillion in debt and it will grow. My mind got blown in 2008 with the financial meltdown. Firms over leveraged themselves, screwed up the economy, the Feds come in and bail them out, and at the end of the day the executives got bonuses? If I did that with my business, I'd be in jail.

Christ, Goldman Sachs bet against the securities they were selling and got hit with a pathetic fine. Go look at DC and see how many former GS employees are there. Pretty scary.
Reply Helpful Comment? 0 0
Joined Aug 2007
WORLD CUP 2014 CHAMPIONS
820 Posts
347 Reputation
#15
Quote from Night_Runner View Post :
Or are you seriously suggesting that the poorest 2% of Americans are just as powerful as the richest 2%?
Quote from specialmoose View Post :
So, if I did my math right we are talking roughly $50k in contributions over 13 years or so.
I agree with Moose. The top 2% aren't really concerned about $50k tax free in a Roth; actually, they can't even contribute to one. I'd estimate top 10% can't, probably more - based on income limits. Feds taxing 401ks is quite a bit different from taxing Roths - and the political costs are different too.

Turn on CNN or FNC and take a look at the people protesting in Wisconsin. Every day I see commercials on TV complaining about schools not being properly funded because the "rich" aren't paying their "fair" share of taxes.

The biggest drawback to taxing Roths would be that the government wouldn't make enough money off of it for it to make much of a difference.
Reply Helpful Comment? 0 0
Page 1 of 2
1 2
Join the Conversation
Add a Comment
 
Copyright 1999 - 2016. Slickdeals, LLC. All Rights Reserved. Copyright / Infringement Policy  •  Privacy Policy  •  Terms of Service  •  Acceptable Use Policy (Rules)  •  Interest-Based Ads
Link Copied to Clipboard