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.

Moving Parts

The tricky part involves moving retirement account money from one bank to another. Let's assume that your client Susan has a $600,000 IRA at Bank A. She is worried about exceeding the FDIC coverage limit, so she decides to move $200,000 of her IRA to Bank B and $200,000 to Bank C.

If that's the plan, be careful. Ask for trustee-to-trustee transfers from one bank to another. Such transfers are always the safest way to avoid tax problems, but they assume the bank will be willing and able to transfer the IRA funds directly to another bank. If this assumption is questionable, the client might prefer simply to withdraw funds from the bank now holding the IRA, so he or she will have the money in hand.

Suppose that Susan withdraws $400,000 from Bank A. She then has 60 days to redeposit the funds in Bank B, Bank C or some other institution that will hold an IRA. This type of transaction, in which the IRA money is withdrawn and put back into tax-deferred territory within 60 days, is a rollover. For each IRA, you can do this no more than once every 12 months (the once-per-year IRA rollover rule).

If Susan has done a rollover to or from an IRA within the past 12 months, she must wait until 12 months (365 days) have passed before doing a rollover from the same IRA. What happens if she violates the 12-month rule? She will then owe income tax on the second withdrawal, plus a 10% penalty if she is under age 591/2, and those funds are no longer IRA funds.

As you might expect, there are exceptions to the 12-month rule. A Roth IRA conversion within 12 months won't jeopardize an IRA rollover. Neither will a transfer or a rollover from a company plan, such as a 401(k) to an IRA.

To illustrate how complex the situation may become, assume George has $600,000 in an IRA in Bank A. Of that $600,000, $150,000 consists of long-term funds while $450,000 is from a 401(k) rollover he completed in July 2008. George won't have any problems if he does a rollover from that IRA within the next 12 months, since the 401(k) rollover does not count toward the once-per-year limit.

On the other hand, suppose that original $150,000 includes just $200 from an IRA rollover done on March 15, 2008. Now George would have to wait until March 15, 2009, to do another rollover from that account. Even $1 of rollover funds will mean that no other rollovers can be made from that account for one year. If George does a $200,000 rollover in October 2008, for instance, he would owe tax and perhaps a 10% penalty on the $200,000 withdrawal.

The bottom line, then, is that you must check the history of each IRA account before determining whether the client can do a rollover from it. Without this careful due diligence, your client risks paying taxes and penalties on his or her retirement funds.

The same consequences apply if a client withdraws IRA money and fails to complete a rollover within 60 days. You can ask the IRS for a waiver under some circumstances, but if it is denied, the client will owe income tax, penalties and interest on the income tax, and perhaps the 10% penalty. There is no IRS relief on the once-per-year rule.

When a bank fails, depositors usually want to get their funds out as quickly as possible. That could mean receiving a check or cash. If the account is an IRA, a check made out to your client is considered a rollover, and the 60-day rule and the once-per-year rollover limit both apply. If other IRA funds were rolled to or from the IRA account within the past 12 months, the depositor will have a taxable distribution.

To add insult to injury, if the funds come from an IRA at a failed bank and the balance is over $250,000, then the depositor might only be able to withdraw $250,000 (the FDIC insured amount). But since that $250,000 cannot be rolled over to another IRA (because IRA funds were already rolled to or from that IRA within the past 12 months), then the entire $250,000 will be taxable and possibly subject to the 10% withdrawal penalty.

Non-Bank Protection

Remember that FDIC/NCUA insurance applies only to bank deposits such as checking accounts, savings accounts, CDs and others. There is no federal deposit insurance for IRA investments in mutual funds, stocks, bonds and annuities, even if they are purchased from an FDIC- or NCUA-insured institution.

However, there is some protection for investments through the Securities Investor Protection Corp. (SIPC). Virtually all securities brokers belong to this organization. SIPC members contribute to a reserve fund that will reimburse investors up to $500,000 per customer, including up to $100,000 in cash. These reimbursements occur in cases of broker theft or the failure of a brokerage firm. Of course, there is no SIPC reimbursement for investments that lose money. If your clients are concerned that a non-bank firm holding IRA investments might go under, they can reduce the risk by holding no more than $500,000 at any one firm.

Wherever your clients invest their IRA money, they are no doubt worried about the future of their retirement funds in today's uncertain market environment. Make sure their accounts do not exceed the federal insurance limits, and if they do, help them to move the funds without creating unwanted tax consequences. If you reassure them that their money is safe today, they will be in a position to reward you handsomely when the market turns around.

Ed Slott, a CPA in Rockville Centre, N.Y., is a nationally recognized IRA distribution expert, professional speaker and author of Your Complete Retirement Planning Road Map and Ed Slott's IRA Advisor, a monthly IRA newsletter. He has also created The IRA Leadership Program and Ed Slott's Elite IRA Advisor Group to help financial advisors become recognized leaders in the IRA marketplace. For more information, visit his website at www.irahelp.com.