Can IRA Money Be Lost?

Financial experts often advise against withdrawing funds from an individual retirement account (IRA) when investments decline, since this can cost you in terms of taxes and penalties.

Prior to the Tax Cuts and Jobs Act, you could deduct IRA losses when cashing out all accounts of one type at once and providing evidence of nondeductible contributions as your basis.

Taxes

Many individuals don’t fully appreciate how taxes impact their retirement savings, which is why Thrivent Financial advisors can assist in creating an optimal savings strategy with tax efficiency in mind.

Tax laws govern individual retirement accounts (IRAs). It’s essential to be aware of how both contributions and withdrawals are taxed at various stages, to avoid surprises in tax returns.

Traditional IRAs are taxed as ordinary income, whereas Roth IRAs do not. You can make tax-deductible contributions to either account but only one can be utilized at any given time.

When withdrawing money from an IRA, it can either be taken in one lump sum or spread out over your life expectancy as mandated by the IRS. If you withdraw more than your Required Minimum Distribution (RMD), income taxes will apply on all the money taken out – in some instances even incurring an early distribution penalty of 10%! RMDs should be calculated and paid each year using an IRS table on life expectancy.

Withdrawals

Money saved in an IRA should help secure and grow for retirement years, but life can throw us a curve ball or two. Although early withdrawal penalties (of 10% of income taxes on any withdrawal prior to age 59 1/2) are strict, certain circumstances allow for unscheduled withdrawals without incurring penalties.

Under certain conditions, including medical emergencies, you are permitted to withdraw funds from your IRA without incurring penalties from the IRS for expenses not covered by insurance, such as an accident or illness. Furthermore, penalty-free withdrawals from an IRA account can also be made towards purchasing your first home provided that certain criteria have been fulfilled, including becoming a qualified first-time buyer.

Your IRA can also help cover college tuition and related costs, unreimbursed health insurance premiums if you become unemployed, and retirement health care premiums if needed. Retirees with traditional or Roth IRAs must begin taking minimum distributions at age 72 (it was 70 1/2 until 2022 when Congress passed the CARES Act to address COVID-19 pandemic); any withdrawals taken annually must be taxed as income.

Loss of Value

No one wants to face the fact that investment accounts can lose value; this can be particularly painful in an IRA where volatile asset classes such as stocks are invested.

IRAs offer great investment flexibility. Subject to any applicable IRA rules, you can invest almost anything – real estate, mutual funds, equities, bonds, gold and silver coins or collectibles like art work, rugs antiques metals gems stamps and alcoholic beverages can be among your options.

Alternatively, if your IRA is losing value, selling assets and reinvesting the proceeds into another asset class could help to mitigate some of its losses – this is known as tax-loss harvesting; any losses generated must first be applied against long-term gains before short-term ones can be used offsetting short-term ones.

Recovery

An IRA’s investment portfolio will fluctuate naturally. Losses in one asset class or economic sector are to be expected, and can often be offset by gains elsewhere in your portfolio. One way to mitigate potential losses is to diversify and regularly rebalance your portfolio.

Before the Tax Cuts and Job Act (TCJA), traditional IRA losses could only be deducted to the extent they exceeded 2% of your adjusted gross income and you had to itemize and report your loss on Schedule A.

If you’ve experienced losses in an IRA, consider whether withdrawing the funds makes sense. By withdrawing them, tax-deferred growth of those funds is no longer eligible; seeking advice from a financial advisor to determine whether this decision suits your retirement goals and personal circumstances is worthwhile. You may be eligible to roll your inherited IRA balance over into an inherited IRA depending on who inherits it; please see IRS Publication 590-B for further details.


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