Ask Liz Weston

Get smart with your money

brokerage

Q&A: Is it wise to have all your accounts under one roof?

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Dear Liz: I’m setting up accounts post-divorce, while learning personal finance on the fly. Is it “safe” or advisable to have all of my larger accounts — IRAs, 401(k), cash management — with the same institution, or should I spread them around? I have smaller checking and savings accounts with a good credit union.

Answer: Using a single investment firm is certainly convenient, and most people will be just fine having all their accounts in one place.

The Securities Investor Protection Corp. covers accounts up to $500,000, including up to $250,000 in cash. This insurance protects you if the brokerage fails and your cash or securities go missing.

Customers with multiple accounts often get more coverage. For example, IRAs and Roth IRAs would each get up to $500,000 in coverage, as do individual and joint brokerage accounts. A person with all four types of accounts would have $2 million in coverage. Accounts for corporations, trusts, estate executors and guardians of minors also get separate coverage. For more details, see SIPC’s brochure, “How SIPC Protects You.”

Your 401(k) has its own protections. Assets in 401(k)s are placed into trust accounts, separate from the investment firms that administer the plans and the employers that sponsor them. The money can’t be touched by creditors of either one.

Q&A: When a Roth IRA makes sense

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Dear Liz: I have some money saved in a brokerage account, over and above my maximum 401(k) contribution. I just turned 60. Is it advantageous to move that money into a Roth IRA or should I keep it in the brokerage account?

Answer: If you suspect you’ll need this money within five years, then you probably should leave it in the brokerage account (and move it to cash, since money needed within the next few years should not be in the stock market). Otherwise, there’s little downside to moving some of the money to a Roth IRA, if you can, and plenty of upside.

Having money in a Roth gives you “tax diversification,” or a potentially tax-free bucket of money to draw from or leave alone as you see fit. That’s in contrast to 401(k)s, regular IRAs and other retirement plans, which typically require withdrawals to begin at age 72.

You can always withdraw an amount equal to your contributions without paying taxes or penalties. Once the account is at least 5 years old and you’re over 59½, whichever comes later, you also can withdraw any earnings without tax or penalty.

You can contribute up to $7,000 to a Roth this year, assuming you have earned income of at least that amount and your modified adjusted gross income is less than $124,000 if you’re single or $196,000 if you’re married filing jointly. (The contribution limit is $6,000 for people under 50.) If your income is above those limits, your ability to contribute to a Roth starts to phase out. The ability to contribute directly to a Roth ends when your modified adjusted gross income is over $139,000 for singles and $206,000 for married couples.

Q&A: Brokerage accounts

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Dear Liz: I have some questions regarding my brokerage accounts. What happens to my investments there if the brokerage company goes out of business? How much of my investments will I be able to recover and how? Also, does it matter if my accounts are IRAs, Roth IRAs, or conventional brokerage accounts?

Answer: Most brokerages are covered by the Securities Investment Protection Corp., which protects up to $500,000 per eligible account, which includes a $250,000 limit for cash.

Different types of accounts held by the same person can get the full amount of coverage. IRAs, Roth IRAs, individual brokerage accounts, joint brokerage accounts and custodial accounts could each have $500,000 of coverage.

So with an IRA, a Roth and a regular brokerage account, you would have up to $1.5 million in coverage.

If you have a few traditional IRAs at the brokerage, though — say, one to which you contributed and one that’s a rollover from a 401(k) — those two would be combined for insurance purposes and covered as one, with a $500,000 limit.

In addition to SIPC coverage, many brokerages buy additional insurance through insurers such as Lloyds of London to cover larger accounts.

It’s important to understand that SIPC doesn’t cover losses from market downturns. The coverage kicks in when a brokerage goes out of business and client funds are missing.

SIPC is commonly compared to the Federal Deposit Insurance Corp., which protects bank accounts, but there’s an important difference between the two.

The FDIC is backed by the full faith and credit of the U.S. government. SIPC has no such implicit promise that if it’s overwhelmed by claims, the government will come to the rescue.

Q&A: Brokerage follow-up

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Dear Liz: You recently explained the insurance limits for brokerage accounts covered by the Securities Investor Protection Corp. I recently retired from the brokerage industry and wanted to add that many firms have additional insurance coverage beyond the SIPC limits.

Answer: Good point. Brokerages often purchase additional coverage from private insurers on top of what’s provided by the SIPC. To find out how much coverage may be available, ask your brokerage or conduct a search with the brokerage name and “how are my accounts protected” as a search phrase.