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Letter to the editor

On money

FDIC limit increase would help retirees

By HELEN HUNTLEY
Published May 8, 2005

Congress is considering an increase in the federal deposit insurance limits for our bank accounts. I say it's about time.

The current $100,000 limit dates to 1980. If the limit had been adjusted since then to keep pace with inflation, it would be $235,000 today. Or to put it another way, today's $100,000 limit is the equivalent of $43,000 in 1980.

Last week the U.S. House of Representatives passed a bill raising the limit to $130,000 for nonretirement accounts, plus $260,000 for retirement accounts. The bill also calls for periodic cost-of-living adjustments to the limits. For the changes to become law, they will have to pass the U.S. Senate, where they face more opposition than they did in the House.

Critics say the proposal is a subsidy for the rich. However, it also would benefit many people of more modest means, particularly retirees. Many conservative savers choose to keep their entire nest eggs in the bank. They don't want the volatility of investing in individual stocks and mutual funds, so they stash their money in CDs. For them, stability of principal and government insurance are crucial to both financial and emotional security.

Smaller banks have lobbied for the increase in coverage, hoping it will help them compete for deposits against bigger banks. Small banks typically offer better interest rates, but the big ones offer at least the perception of greater security to investors concerned about going over the limit.

Fortunately, there are ways to increase your insurance coverage even under the current law. It's smart to use them if you have accounts that otherwise would be uninsured.

The simplest approach is to use more than one bank. As long as you limit your deposits in a single bank to $100,000 in a retirement account and another $100,000 in nonretirement accounts, you're safe. Another alternative is to structure some of your accounts as trust accounts or joint accounts to increase your insurance coverage. For example, if an account is titled jointly with someone else, half the value counts against each owner's insured total.

For information about structuring accounts, read the booklet "Your Insured Deposit," available on the Federal Deposit Insurance Corp. Web site (www.fdic.gov) or call the FDIC toll-free at 1-877-275-3342 to ask questions.

A newer approach is to do business with a bank that participates in the Certificate of Deposit Account Registry Service (www.cdars.com) that secures insurance on as much as $15-million in one banking relationship by spreading the money across the bank network. So far only a few Tampa Bay area banks participate.

Jumping through those kind of hoops shouldn't be necessary if all you've got is an account that's modestly over a 25-year-old limit. However, taking precautions is better than putting your money at risk.

Some months ago I purchased some shares of GM stock, ticker GMS, callable, paying 7.5 percent. The price has taken a dive. If GM decides to call in the stock, will I receive the current share value?

General Motors can call this stock for $25 a share any time on or after June 30, 2009. If it isn't called, it matures in 2044. This stock represents a note, or unsecured debt. The decline in price reflects investor concerns about automakers' finances. Obviously you and other investors who hold this security are counting on GM meeting its obligations.

It was our understanding that since you pay the taxes on the money before it goes into a Roth IRA that the additional income you earn over a period of time is never taxable. Apparently this is not true. What is the point of having a Roth if the interest earned will become a taxable event?

The point is the opportunity to avoid tax on the interest if you follow the rules. You can always withdraw your own contributions tax-free. For the investment earnings to be tax-free, you must meet both of these requirements: It must have been at least five years since you made your first Roth contribution and you must be at least 591/2.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified May 8, 2005, 00:45:19]