CDARS and FIRE: How the Certificate of Deposit Account Registry Service Can Help Secure Your Wealth

For those on the Financial Independence, Retire Early (FIRE) journey, the goal is to build wealth and ensure it’s protected in the most efficient ways possible. While most people are aware that the Federal Deposit Insurance Corporation (FDIC) covers up to $250,000 per depositor per bank, this coverage may not be enough for high-net-worth individuals who are looking to manage large sums of money without taking on excessive risk.

This is where CDARS (Certificate of Deposit Account Registry Service) comes into play. CDARS allows you to maximize FDIC insurance coverage by distributing large deposits across a network of member banks, all while keeping everything under the umbrella of one single point of contact. For those pursuing FIRE, CDARS can offer a convenient, safe way to protect your funds while growing them through certificates of deposit (CDs).

In this article, we’ll explain how CDARS works and how it can be a helpful tool for those looking to secure their financial future while pursuing the FIRE movement.

Background

As a FIRE enthusiast, you’re likely looking for ways to grow your wealth in a sustainable, low-risk manner, with an eye on financial security as you approach your retirement goals. For those who are fortunate enough to have significant cash reserves, the FDIC insurance limit of $250,000 per depositor per bank may feel restrictive, especially if your financial independence strategy involves substantial savings.

CDARS, managed by IntraFi, solves this problem by spreading large deposits across multiple banks within the CDARS network. By doing so, CDARS ensures that your funds remain insured by the FDIC while earning interest through certificates of deposit. This allows FIRE followers to deposit millions of dollars while maintaining the peace of mind that their assets are fully insured and protected.

Key Concepts

• FDIC Insurance: The Federal Deposit Insurance Corporation insures deposits up to $250,000 per depositor, per bank. For those accumulating wealth to retire early, this insurance limit can quickly become insufficient if you’re working with large sums.
• CDARS: The Certificate of Deposit Account Registry Service is a program that allows you to break up a large deposit into smaller amounts, each insured up to $250,000, and spread across a network of FDIC-insured banks, thus ensuring full insurance coverage for larger amounts.
• IntraFi: The company that operates the CDARS network, linking banks together so they can share depositors’ funds across multiple FDIC-insured institutions.

Detailed Explanation

How CDARS Works for FIRE Seekers

For individuals working towards financial independence, managing large sums of capital is often necessary. Once you reach a significant asset level, you may have hundreds of thousands or even millions of dollars to deposit, which quickly exceeds the standard FDIC insurance limit of $250,000. CDARS provides an easy solution to this problem without the complexity of managing multiple accounts at different banks.

To use CDARS, you first open a certificate of deposit (CD) at a participating bank. You can select from various CD terms, ranging from three months to four years. Once you deposit your money, the bank uses the CDARS network to divide your funds and place them at several other FDIC-insured member banks. Each of these deposits is kept below the $250,000 limit, ensuring that all of your money remains protected by FDIC insurance.

For example, if you had $800,000 to invest, CDARS would distribute the funds across several banks as follows:

• $250,000 at Bank A
• $250,000 at Bank B
• $250,000 at Bank C
• $50,000 at Bank D

Even though your funds are spread across multiple institutions, you only need to work with the original bank you deposited with. The process of managing your CDs is simplified, allowing you to maintain a hands-off approach to your investments—a critical element of the FIRE lifestyle.

Benefits of CDARS for FIRE Savers

As someone on the FIRE path, you’re likely seeking to maximize both returns and security. CDARS offers several key benefits that align well with these goals:

1. Extended FDIC Insurance: By using CDARS, you can insure deposits far beyond the typical $250,000 limit. This is especially useful for FIRE enthusiasts with large sums saved up, ensuring that your wealth remains fully protected.
2. Simplicity and Convenience: Managing a large portfolio of CDs across multiple institutions can be a headache. With CDARS, all your deposits are spread across a network of banks, but you only need to interact with your initial bank. This reduces the administrative burden, which is ideal for someone looking to free up time for other aspects of their FIRE journey.
3. No Direct Cost: CDARS is typically free for depositors. While banks or custodians may charge maintenance fees, there are generally no direct charges for using the service. This cost-effectiveness supports the FIRE goal of keeping investment expenses low.
4. Flexibility: With terms ranging from three months to four years, CDARS provides a variety of options for your cash management. This flexibility allows you to tailor your strategy as you build wealth for early retirement.

Drawbacks to Consider

While CDARS offers many advantages, it’s important to also consider potential downsides:

1. Illiquidity: As with any CD, your funds are locked in for the term you select. If you need access to your money before maturity, you will face penalties for early withdrawal. This could be a downside if you anticipate needing liquidity for future FIRE-related expenses.
2. Potentially Lower Interest Rates: Because banks pay a fee to be part of the CDARS network, the interest rates offered on these CDs may be lower than what you could earn from traditional CDs at individual banks. FIRE seekers who rely heavily on interest income may find this aspect less appealing.
3. Complicated at Larger Deposit Levels: While CDARS is convenient for those managing large sums, the process can become cumbersome when dealing with extremely high balances. Managing deposits across multiple banks may still require more oversight as the total amount increases.

Alternatives to CDARS for FIRE Enthusiasts

If CDARS doesn’t align with your needs, there are other ways to secure FDIC insurance for deposits over $250,000:

1. Joint Accounts: A joint account with another person allows you to double the FDIC insurance limit to $500,000, providing more coverage without having to use CDARS.
2. Multiple Bank Accounts: You can manually distribute your deposits across several banks. This requires you to manage multiple accounts and statements but gives you control over where your funds are placed.
3. Cash Management Accounts (CMAs): Offered by certain brokerages, CMAs often sweep excess deposits across multiple FDIC-insured institutions, providing similar protection to CDARS while allowing for easier management of funds.
4. Money Market Accounts: These accounts offer liquidity and competitive interest rates, but they may not always offer the same level of FDIC insurance protection as CDARS for large balances.

Frequently Asked Questions

What does CDARS mean in banking?

The Certificate of Deposit Account Registry Service (CDARS) is a service that allows depositors to insure and manage large amounts of money by spreading deposits across multiple FDIC-insured institutions, ensuring that all funds are protected up to the $250,000 limit per bank.

How much can I invest in CDARS?

There is no fixed maximum for how much you can invest in CDARS. Some banks offer coverage up to $25 million or even $50 million, depending on the bank’s policies and the FDIC’s coverage capacity.

How much does CDARS cost?

Typically, there are no direct costs to depositors for using CDARS. However, some participating banks may charge fees for maintenance, and the network fees may slightly affect the interest rates offered.

Can credit unions offer CDARS?

No, credit unions do not offer access to CDARS. They provide FDIC coverage through their own mechanisms, often using the National Credit Union Administration (NCUA) for insurance.

Conclusion

For those pursuing Financial Independence, Retire Early (FIRE), securing large sums of money while keeping it safe is a key concern. CDARS offers an efficient and relatively straightforward way to ensure your deposits exceed the typical $250,000 FDIC insurance limit without the hassle of managing multiple accounts at different banks.

While CDARS offers significant benefits, particularly in terms of security and convenience, it’s important to understand the potential downsides, like illiquidity and possibly lower interest rates. For FIRE enthusiasts looking for a way to protect large deposits while maintaining a low-maintenance approach to savings, CDARS can be a valuable tool in your financial strategy.