Robinhood debate highlights the difference between FDIC and SIPC protection

If you want to park your money in a safe place amid current market volatility, there’s one thing you absolutely need to do.

Check what kind of protection the financial institution holding your money has.

This bubbled up as an issue this week on the news that Robinhood, an online stock trading app, announced that it plans to offer accounts that would compete with the checking and savings accounts offered by banks.

No savings

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The news caught the eyes of many for one reason: Robinhood is promising 3 percent interest, a return unheard of since the financial crisis because the Federal Reserve has kept rates low.

But there is a key difference between investing with Robinhood and your typical bank offering traditional checking and savings accounts.

Here’s the fine print: Robinhood states in its disclosures that it is covered by the Securities Investor Protection Corporation, or SIPC, a nonprofit membership corporation. Banks, meanwhile, are covered by the Federal Deposit Insurance Corporation, or FDIC.

And the distinction between the two could make a big difference in how much you get back if something were to happen to the financial institution with which you’ve invested.

FDIC vs. SIPC

If your bank is covered by the FDIC, your money is insured for up to $250,000 per depositor. And if you have money parked with another financial institution covered by the FDIC, you are also covered for up to $250,000 there.

That means if the financial institution you’re banking with fails, you will get your money back. If your bank fails, you will get refunded dollar for dollar the money you put in, plus interest up to the date the institution went under.

In contrast, if your institution is a SIPC member, you do not get the same level of coverage. If something happens to your brokerage firm, you are covered for up to $500,000, with a $250,000 limit for cash.

[“source=cnbc”]