Watch Out for This Pitfall if You Put Your Home Sale Proceeds in the Bank

Selling a home can be cause for celebration — especially if you make more than enough money to repay your outstanding mortgage loan balance and you have a lot of cash left over.

If you aren’t planning to buy a new house right away — or ever — after a home sale, you’ll need to decide what exactly to do with the money that you get at closing when your sale goes through. For many people, the right answer is to put the money in a savings account. But if that’s your plan, there’s one key mistake you can’t afford to make.

Be aware of this risk to your money

Putting the proceeds of your home sale into a savings account can make sense because savings accounts don’t really present a risk of loss in typical situations. You’ll be able to earn some interest on the money until you decide what to do with it (like use it to buy a new house or to invest it if you won’t need it for the long term). And you won’t risk your investment value going down like you would if you put the money into the stock market.

You should also have the peace of mind that comes with knowing if the bank fails, you won’t lose your money because you can pick an FDIC-insured savings account. This means the Federal Deposit Insurance Corporation will make sure you get your full deposited amount back if your bank fails.

The issue, though, is that the FDIC only insures up to $250,000 per person per account. This means that if you have more than that amount (or if you and your spouse have more than $500,000 in a joint account), you may not be fully protected against the risk of bank failure.

Now, if the proceeds from your home sale are below these thresholds, you can park the money in savings without worrying about this. But if you make a really generous profit, then you need to know that the FDIC may not fully cover all of your deposited funds.

How much should you worry about going over the FDIC insured limit?

Going over the FDIC limit may not seem like a big risk, but the reality is that banks can and do fail, even in this day and age. In fact, several banks collapsed just this year alone. These were trusted banks used by many businesses and individuals, but they still had serious problems that led to their collapse.

Now, the FDIC ended up taking care of the people who had money deposited at these banks even if their accounts were above FDIC limits. But there’s no guarantee that will happen in every situation since there is that $250,000 or $500,000 limit in place.

In many cases, rather than take the chance, you’re better off splitting the money into a few separate accounts. Remember, the FDIC-insured limit applies per person, per account, so if you spread your money around just a few different savings accounts with different banks, you shouldn’t have to worry that a bank collapse could lead to the loss of the proceeds from your sold home.

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