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Managing FDIC Limits on CDs

Jan 11, 2008
Most consumers are aware of the current problems that some financial institutions are experiencing. This has caused some concern for large investors, those with CD investments over the maximum amount that is covered by the Federal Deposit Insurance Corporation. Currently, the maximum allowed is $100,000 per account.

The simple answer to this problem is to spread your certificate of deposit money into various accounts at various institutions with each account not exceeding the limit. This is completely legal and many investors are doing just that. However, keeping money in several locations can cause bookkeeping problems. There is another way of doing this can be far easier. A somewhat new service, the Certificate of Deposit Account Registry Service, or CDARS, can do this work for you.

Promontory Interfinancial Network is the company that provides this service. It has been available for over five years and nearly 1,800 banks and thrifts in all 50 states offer the service. The service allows CD depositors with balances of up to $50 million to have their entire balances insured by the FDIC.

Let's look at how this works. In this example, the investor has a $1 million CD.

The investor would go a participating bank which is called the lead bank, and fill out an account application, along with a CDARS agreement. Once this is completed, the lead bank would then act as the account custodian and, through the CDARS program it would spread the deposit to over 11 FDIC-insured institutions, making sure that each has less than $100,000.

The lead bank would then give the investor a single account number along with a single account statement that details which institutions are securing the money. The investor would also get one 1099 statement for taxes, or other relevant tax statements for IRA accounts, thus making bookkeeping much easier.

In addition, the Bank of New York, a unit of Bank of New York Mellon, acts as the sub-custodian for the CD account, which means that the only place that has your personal information is the lead bank that you started with.

CD's are currently available for terms from four weeks to five years. Interest payments can be made monthly, quarterly, semiannually, annually or at maturity.

Investors using CDARS are not charged fees to open accounts. Instead, participating banks pay a fee to join CDARS, and pay transaction fees to Promontory Interfinancial depending on the amounts of the deposits.

While this program offers investors many benefits, it also requires prudence on the part of the investor. Just like most other certificates of deposit, there are penalties for early withdrawals. The penalties vary. The most severe are for early withdrawals from CD's that have maturities of up to 26 weeks. For these, the penalty is the interest for the entire period of the CD. For longer-term CD's, early-withdrawal penalties are generally the interest for half the CD term but these may vary so investors should ask before withdrawing.

You can learn more about CDARS by visiting their website or talking with a participating bank or saving and loan institution.
About the Author
Peter Kenny is a writer for The Thrifty Scot, please visit us at Mortgage and Unsecured Loans
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