Vanguard FDIC insured

Is Vanguard FDIC and SIPC Insured?

For how much brokerage and IRA accounts' cash and funds have SIPC insurance coverage at Vanguard? Is Vanguard FDIC insured in 2023?

Is Vanguard FDIC Insured?

Vanguard has SIPC insurance but it doesn’t have FDIC insurance. Here are the details:

Vanguard only offers brokerage accounts. It does not have any bank accounts, like checking or savings accounts.

The FDIC only guarantees bank accounts, so there is no FDIC insurance at Vanguard.

Every brokerage account at Vanguard is protected by SIPC. The insurance limit is $500,000. Up to $250,000 of this maximum can be applied to idle cash.

Vanguard fdic insured

Calculating SIPC Coverage at Vanguard

SIPC insurance generally is per customer, per brokerage firm. This means you can double up by having multiple accounts at multiple brokerage firms, but not multiple accounts at a single firm. This rule itself has exceptions, though.

For example, under SIPC rules, IRAs have their own insurance that is separate from taxable accounts. And Roth IRAs are separate from Traditional IRAs.

If you have 2 IRAs at Vanguard (one Roth and one Traditional) and 2 taxable individual accounts, you would have a total of $1.5 million of insurance. The retirement accounts would have a total of $1 million of protection ($500,000 for the Roth, and another $500,000 for the Traditional), and the taxable accounts would have another $500,000 (but not $500,000 for each).

But if one of the taxable accounts is a joint account, it would have its own $500,000 limit, which would produce $1 million in total insurance for the taxable accounts.

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Money Market Settlement Fund

Vanguard uses a money market mutual fund as the core position for every brokerage account. Thus, a free cash balance in an account will be automatically swept into a money market fund. Vanguard calls this fund the settlement fund.

Because the settlement fund is considered a security, it receives $500,000 worth of SIPC protection instead of $250,000. It is not considered cash, although it is a cash equivalent, and the fund’s NAV stays exactly at $1.00 under normal circumstances.

Currently, Vanguard’s Federal Money Market Fund is the only settlement fund available to serve as a brokerage account’s cash position.

Account Example

To illustrate how SIPC protection works at Vanguard, suppose you have a taxable brokerage account with $600,000 of assets. The portfolio is broken down as follows:

$230,000 in Tesla stock
$70,000 in GLD, the gold ETF
$300,000 in VMFXX, the settlement fund

In the very unlikely event that Vanguard filed for bankruptcy and account positions were missing, the entire account would not be guaranteed by SIPC. Only 83.3% of the account would be protected ($500k/$600k). The entire settlement fund, not just $250,000, could be defended, but $100,000 of the account value would be left unprotected, at least by SIPC.

Remember that the assets in the account legally belong to the account holder, not to Vanguard, so if Vanguard did ever file for bankruptcy, creditors could not claim the assets. SIPC insurance is there in case positions ever go missing. In the securities world, this does happen from time to time.

Supplemental Insurance at Vanguard

Vanguard does have an auxiliary insurance policy through Lloyd’s of London and London Company Insurers. It adds a second layer of protection to a brokerage account if, and only if, SIPC protection is exhausted.

The secondary insurance policy is good for up to $49.5 million per account. There is an aggregate maximum of $250 million. That means the insurance policy will shell out a quarter of a billion dollars at most across all accounts that have maxed out SIPC coverage.

Going back to our example, the $100,000 of account value that is unprotected now should be protected by the supplemental insurance policy, assuming the aggregate limit is not exhausted. After that point, there are no guarantees.