September and October were not kind to retail banks. On Sept. 25, the Federal Deposit Insurance Corp. (FDIC) seized the assets of Washington Mutual and brokered a sale to JP Morgan Chase. It was the largest bank failure in U.S. history.

Four days later, Citigroup agreed to pay $2.16 billion for an ailing Wachovia, the third largest bank in the country. Two weeks later, Wells Fargo was the winner in a bidding war for Wachovia's assets.

Whether other banks will follow these two remains to be seen. Given the numbing drumbeat of bad news, even the coolest clients with IRAs at a bank might be concerned about their retirement accounts. The good news: Retirement accounts are federally insured up to $250,000 per bank. Congress raised the limit from $100,000 in 2006.

The $250,000 limit for federal deposit protection applies to retirement accounts at banks and savings associations insured by the FDIC, as well as credit unions insured by the National Credit Union Administration (NCUA). (For non-retirement accounts, the FDIC or NCUA limit temporarily increased to $250,000 from $100,000 as part of the 2008 Economic Stabilization Act, effective Oct. 3.)

The federal insurance coverage for retirement accounts applies to traditional and Roth IRAs, simplified employee pension (SEP) IRAs and savings incentive match plans for employees (SIMPLE) IRAs. In addition, the coverage also includes self-directed Keogh accounts, 457 plan accounts for state government employees and self-directed employer-sponsored defined contribution plans, including 401(k) and SIMPLE 401(k) accounts.

Defining Self-Directed

For purposes of FDIC insurance, self-directed means that the plan participant can instruct administrators how his or her retirement funds are to be invested, including the ability to direct those funds to an FDIC-insured account. An account with a default option that states that funds will be invested in an FDIC-insured account if no option is chosen is also considered a self-directed account, since the participant elected that option by taking no action.

However, a retirement plan whose only investment option is the deposit accounts of a specified bank is not considered a self-directed account and is not covered by FDIC insurance. On the other hand, a plan for a single employee/employer (a sole proprietor) can limit investments to a single option and will still be considered a self-directed plan under the insurance rules.

For example, assume that Plan A, a SIMPLE 401(k) account, allows participants to establish their SIMPLE accounts at any bank of their choosing. This retirement plan would be considered a self-directed plan, and deposits in the SIMPLE could thus be covered up to $250,000.

Participants in Plan A who do not establish SIMPLE accounts at the bank of their choosing will have accounts established for them at ABC bank. These are still self-directed accounts, because the participants chose ABC Bank by not establishing their own accounts elsewhere. The deposits in these SIMPLEs could be covered up to $250,000.

Participants in Plan B must establish their SIMPLE 401(k) accounts at XYZ bank and can only use the deposit accounts offered by that bank. These accounts would not be considered self-directed and would not be covered by the FDIC.

Under the FDIC/NCUA rules, all of an individual's retirement accounts at the same insured bank are added together and insured up to a limit of $250,000. Thus, if a client has $200,000 in a traditional IRA and $100,000 in a Roth IRA at ABC Bank, federal deposit insurance would cover $250,000 of those accounts, leaving $50,000 uninsured.

Beneficiary Issues

If an individual has a personal IRA and an inherited IRA at the same bank, they are insured separately for $250,000 each. Naming different beneficiaries on an individual's retirement accounts will not affect the coverage limits for the individual, according to the rules.

For example, assume that William has an IRA with a balance of $250,000 at First National Bank and has named Robert as the beneficiary of this account. William also has a Roth IRA with a balance of $75,000 at First National, and he has named Tim as the beneficiary of that account. Because William only has FDIC coverage for $250,000, his Roth IRA will be uninsured.

William also has an IRA he inherited from his father at the same bank. Since he is a beneficiary of this account and not the owner, he has up to $250,000 in coverage on this account in addition to the $250,000 in coverage he has on the personal IRA account where he has named Robert as the beneficiary.

Retirement accounts are separately insured from any other deposits the client may have at the same institution. If, for example, William also has a $70,000 non-IRA certificate of deposit (CD) in his own name at First National Bank, plus a $70,000 non-IRA CD in joint name with his spouse, both non-retirement accounts would be fully insured because they are under the $250,000 temporary deposit insurance limit. The insurance for the non-IRA accounts would be in addition to the $250,000 of insurance for retirement accounts at First National Bank.