The Federal Deposit Insurance Corporation (FDIC) insures bank deposits in the event that a bank fails. The National Credit Union Association (NCUA) does the same for deposits at credit unions. But this insurance only goes so far, as there are limits on the amount of money that’s covered. The Certificate of Deposit Account Registry Service or CDARS can help to close gaps in coverage for people who maintain higher bank account balances. CDARs allows you to spread out funds across multiple certificates of deposit (CD) accounts at different banks, while managing them under a single umbrella.
Consider talking to a financial advisor about the best way to protect excess deposits.
FDIC Coverage Limits
The FDIC insures deposits at banks to protect consumers against the unlikely possibility of a bank failure. Currently, deposits are insured up to $250,000 per depositor, per account ownership type, per financial institution.
So if you have a savings account and a checking account at the same bank, you’d be covered up to a combined balance of $250,000. But if one of those accounts had a joint owner, such as a spouse or parent, you’d be covered up to $500,000. The NCUA offers the same coverage limits for depositors who keep money at credit unions.
While FDIC insurance limits and NCUA limits may seem generous to the average person, they can be problematic for super savers or higher net worth individuals. It’s possible that some of your deposits may not be covered once they exceed the specified limits.
Moving money to different accounts at different banks is one option. But that can be tricky to manage if you have to open multiple accounts. Using CDARS to manage deposits that exceed FDIC coverage limits or those set by the NCUA may be a simpler option.
What Is CDARS?
The Certificate of Deposit Account Registry Service, or CDARS, is a network of banks that work together to help high-balance savers insure their deposits. This network only includes FDIC-insured banks.
CDARS is not a bank itself; instead, it’s a program that’s designed to help savers maximize their FDIC coverage limits. This is accomplished by allowing savers to establish certificate of deposit accounts through multiple banks through a single outlet.
How CDARS Works
In simple terms, CDARS acts as a custodian for deposits. When you deposit money into a CDARS account, those funds are spread across certificate of deposit accounts at network banks. Each of those accounts is insured up to the FDIC limits and each bank is responsible for determining what interest rate to pay to savers. For example, say you currently have $1 million in cash that’s not covered by FDIC limits at your current bank. You could open a CDARS account and deposit that $1 million into it. Your money would then be spread across five CD accounts at five different banks, with deposits of $200,000 each.
This means your savings is protected up to the $250,000 FDIC limit. And since you’re depositing less than $250,000 into each CD, you’re leaving room for any interest the CDs earn to be protected as well.
CDARS banks may set limits on the minimum deposit required to open a CD, as well as the maximum amount you’re allowed to deposit. The maturity terms for each CD can also vary, just the same as they can when opening CDs outside of the CDARS program. Network banks can also impose early withdrawal penalties for taking money out of a CD ahead of its maturity date.
How CDARS Benefits Savers
Using CDARS to manage savings can minimize the possibility of falling outside the FDIC coverage limits. When you work with the CDARS program, you can get FDIC insurance through multiple covered institutions in one place.
This can offer reassurance that your accounts are covered in the rare event that a CDARS member bank fails. At the same time, CDARS offers convenience to savers.
Rather than having to open multiple accounts at different banks yourself, you can open just one with a CDARS network bank. You’ll need to complete a Deposit Placement Agreement to allow the bank to distribute funds to other network banks. But that can be easier to do than opening different accounts yourself.
CDARS doesn’t charge any fees to depositors to take advantage of this service. Keep in mind that network banks may charge their own fees to open or maintain CD accounts, including monthly fees or excess withdrawal fees.
Drawbacks of Using CDARS
The biggest potential downside of using CDARS to protect and insure deposits above the FDIC limit has to do with the interest rates you may earn. Since you’re not selecting CDs yourself, you’re not guaranteed to get the best rates on the different CDs that are opened on your behalf.
How important that is to you may depend on where else you’re keeping savings and investments. If you have money in high-yield savings accounts, high-yield money market accounts, IRAs or an online brokerage account, the returns you’re earning from those may outweigh less than stellar interest rates generated by a CD.
Ultimately, whether to use CDARS can depend on what’s more important to you: getting the best CD rates or protecting your deposits.
Using banks in the CDARS network to manage deposits is an option but it’s not a requirement. You could choose to keep your money where it is, without increasing your FDIC coverage limits. After all, bank failures are not a common or typical event in the finance world. You could choose to open multiple accounts yourself and deposit funds into them. You may prefer this option if you want to rate shop to get the best APY for CD accounts or open other types of accounts, such as checking, savings or money market options.
Finally, you could consider a trust account instead of a traditional bank account for protecting funds. Opening trust accounts with multiple beneficiaries could increase your coverage limits. And if you’re setting aside money for your spouse or children, a trust would allow you to specify how that money is to be used.
The Bottom Line
The Certificate of Deposit Account Registry Service can help high-balance savers to protect their deposits when they exceed FDIC coverage limits. Whether it makes sense to use CDARS to manage savings can depend on how much you have in cash reserves and your financial goals.
Tips for Financial Planning
- If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. It takes just a few minutes to get your personalized advisor recommendations online. If you’re ready then get started now.
- Brokered CDs may be another option for managing savings in excess of FDIC coverage limits. Brokered CDs are offered by brokerages, rather than banks. You may also be able to protect some of your funds through a cash management account at a brokerage. Cash management accounts share features of checking and savings accounts while offering convenient access to funds you plan to invest. Depending on the brokerage, you may be able to open a cash management account that offers up to five times the FDIC coverage limits.
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