Roth IRA losses aren’t typically tax deductible. An exception is when youve fully withdrawn and closed the Roth IRA account, and total distributions are less than contributions. Even then, it must be claimed as a miscellaneous itemized deduction, subject to restrictions. Learn more about the rules and qualifications and how to report Roth IRA losses properly.
It permanently extends tax cuts from the Tax Cuts and Jobs Act and raises the limit on how much state and local sales tax and property tax (SALT) you can deduct. It also cuts energy credits passed under the Inflation Reduction Act and changes taxes on tips and overtime for some workers. It also changes Medicaid, raises the debt ceiling, and change the rules for Pell Grants and student loans. Updates to this article are in process. Check our One Big Beautiful Bill article for more information.
You worked hard to save for retirement. If the value of the investments in your Roth IRA (Roth Individual Retirement Account) goes down, you may be wondering if you can write off those losses on your federal income tax return. The IRS doesn’t let you deduct losses from your Roth IRA from year to year. This means that the only way to deduct your losses is to close your Roth IRA accounts.
Additionally, this deduction is only available through 2017. For tax years after 2017, the deduction described below is no longer available.
Let’s face it – retirement planning can feel like a maze. One question that keeps many future retirees up at night is whether their hard-earned savings in an IRA account could vanish before they ever get to enjoy them. The short answer? Yes you can lose money in an IRA account – but it’s not as scary as it sounds once you understand how these accounts work.
The Truth About IRA Losses
IRAs (Individual Retirement Accounts) are popular retirement vehicles that offer tax advantages, but they’re not all created equal when it comes to risk. The key thing to understand is that an IRA itself isn’t an investment – it’s a container that holds investments.
As William Perez, a tax expert with 20+ years of experience, explains in The Balance Money, “Investments can sometimes lose value. These losses can present challenges when your investments sit inside an individual retirement account (IRA)”
The real question isn’t whether you can lose money in an IRA, but rather what type of IRA you have and what investments you’ve chosen within it.
IRA Savings Accounts vs. IRA Investment Accounts
According to Affinity Federal Credit Union the answer to whether you can lose money depends on the type of IRA account
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IRA Savings Accounts: “If your money is in an IRA savings account, the answer is no – there’s essentially no risk of losing your money. Bank and credit union savings accounts are federally insured for up to $250,000 per account.”
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IRA Investment Accounts: “If your money is in an IRA investment account, it’s typically invested in the stock or bond market. Those assets can go down in value, causing you to lose money.”
Why Do IRA Accounts Lose Money?
According to Fidelity Investments data shared by Exponential, average IRA balances dropped nearly 2018% from the same time last year in the second quarter of 202022. But why?.
Market Volatility
The most common reason your IRA might lose value is regular market fluctuations. For instance, at the beginning of the COVID-19 pandemic, the S&P 500 dropped by about 34% in just one month! However, it went on to reach record highs soon after.
Other Factors That Can Impact Your IRA Value:
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Interest Rate Changes: As Experian points out, “The Federal Reserve has increased interest rates six times so far in 2022. Rate changes can indirectly affect investments.” Higher rates can lead to reduced consumer spending and more expensive business loans, potentially causing stock values to drop.
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Inflation: This sneaky factor reduces your purchasing power over time. If you have $100,000 in an IRA today, ongoing inflation means those dollars won’t stretch as far when you retire.
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Political Uncertainty: “Domestic and global politics can indirectly affect IRA balances. As Russia-Ukraine tensions escalated in early 2022, for example, the S&P 500 dropped by more than 10%,” notes Experian.
The Tax Side of IRA Losses
It is important to remember that IRA losses used to be tax-free before 2018. “You used to be able to lose money on your IRA plans if you cashed out all of your traditional or Roth IRAs,” says The Balance Money. That tax loophole ended with the 2018 tax year. “.
This loss provision might return after 2025 when the Tax Cuts and Jobs Act (TCJA) is set to expire, but there’s no guarantee.
What Should You Do If Your IRA Loses Money?
Market changes are normal, and making hasty decisions could make things worse. Here’s what financial experts recommend:
1. Stay Invested
Experian cautions: “Watching your IRA balance decline can be nerve-racking, but panic selling your investments could come back to bite you.”
Remember those who sold investments during the pandemic panic? They missed out on the incredible growth that followed. From 2011 to 2020, the S&P 500’s average annual return was 14.4%. Trying to time the market is virtually impossible.
2. Diversify Your Portfolio
If you’re worried about IRA losses, check if your investments are properly diversified. Having too much money in one type of asset, economic sector, or region increases your risk.
Experian advises, “If one area of your portfolio declines in value, you might have gains in other areas that balance things out.”
3. Match Your Strategy to Your Timeline
Your age and retirement timeline matter tremendously:
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Younger investors (further from retirement) can typically handle more risk because they have time to recover from downturns.
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Older investors (closer to retirement) might want to shift toward safer investments that preserve capital.
4. Consider Professional Help
A financial advisor can evaluate your specific situation and help create an investment strategy aligned with your goals and risk tolerance.
Types of IRAs and Their Risk Levels
Let’s break down the common IRA types and their risk profiles:
Traditional and Roth IRAs
These can be invested in almost anything – stocks, bonds, mutual funds, ETFs, etc. The risk level depends entirely on what you choose to invest in within the account.
IRA Savings Accounts and CDs
These are FDIC-insured (or NCUA-insured at credit unions) up to $250,000, making them extremely low-risk. Your principal is protected, but returns are typically lower than investment options.
Self-Directed IRAs
These give you the most investment flexibility, including real estate and alternative investments. They can carry higher risk depending on your choices.
Real-World Examples of IRA Loss Protection
Let me share a personal story. My cousin Jake had his entire IRA invested in tech stocks in 2000 right before the dot-com bubble burst. He lost nearly 60% of his retirement savings in just months! But instead of pulling out, he rebalanced his portfolio to include more diverse investments and stayed the course. By 2010, not only had he recovered his losses, but his account had grown significantly.
The lesson? Time in the market beats timing the market for most retirement savers.
Practical Tips to Protect Your IRA
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Reallocate assets inside the plan rather than taking distributions (which could trigger taxes and penalties)
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Gradually shift to less volatile investments as you approach retirement
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Experian says, “The cost of high-interest debt can chip away at investment gains.” So pay down large amounts of debt while you invest.
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Take advantage of employer matches in your 401(k) before maxing out your IRA
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Consider opening multiple IRAs if you have over $250,000 to maintain FDIC protection
IRA Fees to Watch For
Don’t forget about fees! Some IRA providers charge maintenance fees that can erode your balance over time. For instance, Affinity Federal Credit Union charges:
- $0 monthly maintenance fees if enrolled in eStatements
- $2 monthly fee for paper statements
The Bottom Line: Should You Worry?
Can you lose money in an IRA? Yes. Should this stop you from having one? Absolutely not!
The tax advantages of IRAs make them powerful retirement tools despite potential market fluctuations. As Affinity Federal Credit Union states, “If you earn money, pay taxes, and want to save money to live on in retirement, individual retirement accounts can help you do so by providing valuable tax benefits.”
Remember, retirement investing is a marathon, not a sprint. Short-term losses are part of the journey toward long-term gains. By understanding your risk tolerance, diversifying appropriately, and maintaining a long-term perspective, you can navigate the inevitable ups and downs of the market while building toward a secure retirement.
FAQs About IRA Losses
Q: Is it safer to have an IRA or a 401(k)?
A: Neither is inherently safer. Both can lose money depending on the investments you choose within them. However, 401(k)s often offer employer matching contributions, which is essentially free money.
Q: What happens if my IRA custodian goes bankrupt?
A: Your IRA assets are held separately from the custodian’s assets, so they’re generally protected if the financial institution fails. Additionally, SIPC insurance protects securities up to $500,000.
Q: Can I claim tax deductions for IRA losses?
A: Not currently. This provision was suspended by the Tax Cuts and Jobs Act until at least 2025.
Q: What’s the safest type of IRA?
A: An IRA savings account or Certificate of Deposit (CD) at an FDIC-insured bank or NCUA-insured credit union is considered the safest, as your principal is protected up to $250,000.
Q: Should I convert my Traditional IRA to a Roth IRA if the market is down?
A: This might actually be an opportune time since you’d pay taxes on a lower account value. However, consult a tax professional about your specific situation.
Remember, we all have unique financial situations and goals. While this information provides a general overview, consider talking with a financial advisor who can tailor recommendations to your specific needs and risk tolerance.
Looking for more information?
It’s not meant to give specific tax, investment, legal, or other business and professional advice. The above article is meant to educate a large group of people about money in a general way. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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Qualifying for a tax deduction
Only in very rare situations can you deduct losses in your Roth IRA account. You have to close all of your Roth IRA accounts, even ones that have money in them, in order to get the tax break.
Your traditional IRAs need not be closed, as they are treated separately, and the value of your Roth IRA from the previous year or at any point during the time the account was open does not matter. You must show a loss from your tax basis in the account.