Why Leaving More Than $250,000 in One Bank Account Can Expose Your Cash to Risk

People who have accumulated large cash balances may be reluctant to put all of it into the stock market, since investing always carries some risk.

However, they may be taking on another kind of risk if they keep more than $250,000 at a single institution.

How deposit insurance works at the $250,000 limit

FDIC insurance covers up to $250,000 per depositor, per insured bank, for each account ownership category. If you hold money at an insured bank, your first $250,000 is protected if the institution fails. Credit unions offer similar coverage through the National Credit Union Administration, or NCUA. Once your balance goes above $250,000, the excess is no longer fully insured.

For example, someone with a $100,000 checking account and a $200,000 savings account at the same bank could have $50,000 that is not insured. That may not matter if the bank remains stable, but that uninsured portion could be lost if the bank fails. Opening several checking, savings, CD, or money market accounts at the same insured bank usually will not solve the issue, because those balances are generally grouped together for FDIC insurance purposes.

FDIC coverage applies only to deposit accounts. Stocks, bonds, cryptocurrencies, and annuities are not protected by FDIC or NCUA insurance.

Why uninsured balances can create problems

Bank failures are uncommon, and the FDIC reported only two last year. Still, failures can increase during periods of economic strain, as seen in years when bank failures topped 100.

Although the odds are low, it may not be worth taking that risk when the fix is simple. If you have more than $250,000 at one bank, you can move some of the funds to another financial institution.

Ways to protect more of your savings

One straightforward approach is to spread money across multiple FDIC-insured banks or NCUA-insured credit unions. Using different ownership categories can also expand coverage. Joint accounts, trust accounts, and certain retirement accounts may be useful, depending on your financial and legal circumstances.

Some banks also offer cash-sweep programs that distribute deposits among partner banks. Even so, it is wise to confirm with the institution that all of your funds are properly protected.

Why holding too much cash may not be ideal

Keeping more than $250,000 in a bank account may also be questionable from a long-term savings perspective. The stock market typically offers much higher return potential than a checking or savings account, or even alternatives such as CDs.

Financial advisers often suggest keeping enough cash in a liquid account to cover three to six months of living expenses. Depending on your goals, risk tolerance, and time horizon, you may choose to keep more available, but it may still make sense to invest some of the money.