Q: I use PayPal a lot when making online purchases and selling collectibles. Are these deposits FDIC insured?

A: PayPal is not a traditional bank, so it may feel as though your deposits are at risk while they sit in cyberspace. The good news is that regular deposits in your PayPal account are eligible for FDIC insurance through the “pass-through” program.

When you deposit money at PayPal, the company places the actual cash into one of several FDIC-insured banks. Since that money belongs to you — PayPal is only holding it on your behalf — you get FDIC insurance up to the current limit of $250,000 in the unlikely event that one of the depository banks should fail.

Now, it is important to note that PayPal uses big, national banks — the same banks you yourself might use. FDIC insurance only covers $250,000 per person, per institution, so if you bank at the same institution were your money is on deposit, you only have $250,000 total.

The simplest way to avoid this, of course, is to pull your money out of PayPal as you receive it, either through their debit card or through a bank transfer. With full control of your money, you can structure deposits to take advantage of the full FDIC insurance coverage, or you can invest it — even a savings account earns more than sitting around at PayPal.

PayPal does offer a Money Market option for those who want to let larger amounts of cash sit at the company and earn interest at the same time. It’s a great option for some, but note that the PayPal Money Market account is a mutual fund, and is not eligible for FDIC insurance.

See this page for full information on PayPal’s FDIC pass-through insurance and current bank list.