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Worried about having too much cash sitting in your brokerage account? You’re not alone. With recent bank failures like Silicon Valley Bank and Signature Bank in March 2023, many investors are questioning the safety of their investments beyond the standard protection limits.
Let’s dive into what you need to know about keeping large sums in your brokerage account and how your investments are actually protected
SIPC Protection: Your Safety Net Explained
The Securities Investor Protection Corporation (SIPC) is your first line of defense if your brokerage firm goes belly-up. It’s a federally mandated, private nonprofit organization created under the Securities Investor Protection Act of 1970.
Here’s what SIPC insurance covers:
- Up to $500,000 in securities
- Up to $250,000 in uninvested cash
But there’s a catch – the total amount of SIPC coverage is $500,000. So if you have both $500,000 in securities and $250,000 in cash, the entire amount might not be covered.
I recently spoke with a client who had nearly $800,000 in one brokerage account and was losing sleep over this very issue. The good news? The protection system is more robust than most people realize.
Beyond the $500,000 Limit: Are You Really at Risk?
Here’s the reality that most investors don’t understand: It’s generally safe to keep more than $500,000 in a brokerage account, and I’ll tell ya why.
Before SIPC even gets involved there are several protective measures in place
- Separate Account Requirement – Brokerages must keep your funds separate from their operational money
- Liquidity Requirements – They must maintain certain cash reserves
- Self-Liquidation Process – Most failing brokerages liquidate and return funds without SIPC intervention
What this means is that even with more than $500,000 in a single account, the chance of losing your money is extremely small In most cases, customers recover all their assets without filing SIPC claims
As one of my colleagues puts it: “SIPC is like airbags in your car – crucial to have, but hopefully you’ll never need to use them.”
Multiple Accounts: A Smart Strategy for Extra Protection
If you’re still concerned about exceeding the $500,000 limit, here’s a practical strategy – open multiple accounts of different types.
The SIPC treats different account types as “separate capacities,” meaning each gets its own protection limit. For example:
| Account Type | SIPC Coverage |
|---|---|
| Individual account | Up to $500,000 (including $250,000 cash) |
| Joint account | Up to $500,000 (including $250,000 cash) |
| Traditional IRA | Up to $500,000 (including $250,000 cash) |
| Roth IRA | Up to $500,000 (including $250,000 cash) |
| Corporate account | Up to $500,000 (including $250,000 cash) |
So if you have a traditional IRA and a Roth IRA at the same brokerage, you’d be covered up to $1 million between them. Pretty sweet deal!
But remember – multiple accounts of the same type at the same brokerage don’t get separate coverage. Two individual accounts at the same firm would only have $500,000 in combined protection.
What SIPC Actually Protects (And What It Doesn’t)
Let’s be clear about what’s covered:
Protected Securities:
- Stocks
- Bonds
- Treasury securities
- Money market mutual funds
- Certificates of deposit
NOT Protected By SIPC:
- Market volatility losses
- Bad investment advice losses
- Security breach losses (unless the brokerage becomes insolvent)
- Commodity futures contracts
- Foreign exchange (forex) trades
- Fixed annuities contracts
- Investment contracts like limited partnerships
We gotta be real – SIPC isn’t insurance against bad investments or market crashes. It only protects you if your brokerage firm fails.
SIPC vs. FDIC: Understanding the Difference
People often confuse SIPC with FDIC coverage, but they’re different animals:
| Feature | SIPC | FDIC |
|---|---|---|
| Coverage amount | Up to $500,000 per owner (including $250,000 cash) | Up to $250,000 per customer, per ownership category |
| What’s covered | Securities and cash in brokerage accounts | Cash in bank deposit accounts |
| Protects against | Brokerage firm failure | Bank failure |
| Does NOT cover | Market losses, bad investment advice | Investment products |
It’s sorta like comparing apples and oranges – they’re both fruit, but they serve different purposes in your financial diet.
What Happens If Your Brokerage Goes Under?
If disaster strikes and your brokerage firm fails, here’s the likely sequence of events:
-
Acquisition – Most likely, another company will acquire the failing brokerage and seamlessly transfer your assets.
-
Court-Appointed Trustee – If no acquisition happens, a trustee takes control of the firm’s records and sets up claims processes.
-
SIPC Intervention – The SIPC helps oversee the process and ensures customer assets are returned properly.
-
Direct Payment – In some smaller cases, the SIPC might handle customer claims directly without court involvement.
I’ve been investing for over 15 years, and I’ve never personally known anyone who’s lost money due to a brokerage failure. The system works remarkably well in practice.
Smart Strategies for Large Investment Portfolios
If you’ve got more than $500,000 to invest, here are some practical approaches:
-
Use multiple brokerages – Spread your investments across different firms for additional SIPC protection.
-
Open different account types – As mentioned earlier, different account types get separate SIPC coverage.
-
Consider excess SIPC coverage – Some brokerages offer additional protection beyond the standard SIPC limits.
-
Research your brokerage’s financial health – Stick with well-established firms with strong balance sheets.
-
Keep some assets in physical form – For precious metals or certain collectibles, physical possession eliminates brokerage risk.
We recently moved about half of a client’s $1.2 million portfolio to a second brokerage firm. Not because we thought the first was at risk, but because it gave them peace of mind. Sometimes that’s worth more than a few basis points in fees!
The Bottom Line: Should You Worry?
Here’s my take: If you have more than $500,000 in a single brokerage account, you probably don’t need to lose sleep over it. The financial system has multiple safeguards beyond SIPC insurance to protect your investments.
That said, if you’re still concerned, spreading your investments across multiple account types or brokerages is a sensible strategy that provides both additional protection and peace of mind.
The most important thing is to understand what’s actually protected and what isn’t. SIPC insurance doesn’t protect against market losses or bad investment decisions – just brokerage failure.
Remember that most brokerage firms are required to keep your funds separate from their operational accounts and maintain certain liquidity levels. This separation provides substantial protection even before SIPC insurance kicks in.
So go ahead and invest with confidence, knowing that your assets are well-protected even beyond the $500,000 SIPC limit!
Have you ever worried about exceeding SIPC limits? What strategies have you used to protect your larger investment portfolio? I’d love to hear your thoughts in the comments below!
Is it safe to keep more than $500,000 in a brokerage account?
It is safe in the sense that there are measures in place to help investors recoup their investments before the SIPC steps in. And, indeed, the SIPC will not get involved until the liquidation process starts. In most cases, customers can recover their assets without having to file a claim with the SIPC.
In most cases, the brokerage will liquidate on its own without needing SIPC intervention. In addition, brokerage firms are required to keep customer funds in accounts separate from their own. They must also have a certain amount of liquidity on hand, thus allowing them to cover funds in these cases.
What this means is that even if you have more than $500,000 in one brokerage account, chances are high that you won’t lose any of your money even if the broker is forced into liquidation.
That being said, if the firm refuses or is unable to self-liquidate and the SIPC must step in, you may not be able to claim more than your $500,000 in securities and cash. Therefore, the safest option is to move your money above that $500,000 SIPC coverage threshold to a different type of account, or to a different brokerage altogether. (Here is our list of the best online brokers.)
What SIPC insurance doesn’t cover
There are a few major types of losses SIPC insurance does not protect against. These include:
- Losses due to market volatility
- Losses due to bad investment advice
- Losses due to security breach, unless the brokerage becomes insolvent
On that last point, note that if the brokerage becomes insolvent due to a hack, the hack itself is irrelevant. If the brokerage becomes insolvent, you may be covered just as you would in any other scenario where a brokerage is forced into liquidation.
In addition to these scenarios, there are specific types of assets that SIPC insurance doesn’t cover. They include:
- Commodity futures contracts (unless they are held in a special portfolio margining account)
- Foreign exchange (forex) trades
- Fixed annuities contracts
- Investment contracts such as limited partnerships
I Have $500,000 in My Taxable Investments. Is That TOO Much?
FAQ
Is it safe to have more than $500,000 in a brokerage account?
How much money can you safely keep in a brokerage account?
SIPC coverage insures people for up to a limit of $500,000 in cash and securities per account. SIPC protections also include up to $250,000 in cash coverage.
Where do millionaires keep their money if banks only insure $250k?
What percentage of retirees have $500,000?
Ages 65 and over: 24.68% have balances between $25,001 and $50,000, but 19.48% do not have a 401(k) at all. Nearly 8% claim to have over $500,000 in their 401(k).