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The recent national financial crisis has exposed a weakness in the FDIC account insurance system of particular importance for those of nearing retirement, a weakness that could cost you a large portion of your retirement savings if you’re not careful.

For years we have been told that deposit accounts in banks and savings-and-loans are insured for amounts up to $100,000.  This is only partially true. What is not generally understood is that this limit applies to the sum of all your accounts in a single institution, including any subsidiary accounts that are also referenced by your social security number.  This may include educational savings accounts, certain retirement savings accounts and medical savings accounts.

While many of us may not have more than $100,000 in any single account, quite a few of us may have more than that in all of our accounts, particularly if retirement accounts are included.  (These days, a retirement account with less than $100K is considered underfunded.)

For example, if you have $5,000 in an interest-bearing checking account, a couple of college savings accounts for your kids worth $30,000 each and a cash retirement account holding $75,000, all in the same institution... you may have assumed that you will be made whole by the FDIC if your bank goes belly-up. That’s not the case.  The total of those accounts is $140,000.  Under current rules, you will only be covered to $100,000 for all the accounts.  You could face a loss of $40,000.

Given the reality that just last week the largest savings-and-loan in the country went bankrupt (Washington Mutual), I strongly urge you to review all your accounts. If you have more than $100,000 in any one FDIC institution, you may want to consider dividing your accounts among several different banks.  Different branches of the same bank are not enough, you should open accounts with different banking companies.