How Do I Keep My IRA From Losing Money?

An IRA can lose value in several ways, including withdrawing before age 59 1/2 or investing too aggressively for your risk tolerance.

IRAs provide numerous advantages, including tax-free growth. You’ll also reduce your taxable income and save faster than with other savings vehicles.

Tax-free growth

Tax-free growth is an attractive feature of an IRA that can help its members save money in the long run, yet it is crucial that investors understand how taxes work before withdrawing any funds from it. Most income in the United States is subject to taxes – including wages, capital gains and dividends from stocks and bonds; retirement savings have their own rules regarding income taxes for withdrawals made from traditional or Roth IRAs as well as penalties associated with early withdrawals.

To reduce taxes on their IRA withdrawals, investors can make qualified charitable distributions (QCDs). These transfers go directly from an IRA into qualifying charities; however, this strategy can be complex so it is wise to consult a financial professional prior to making any decisions.

Early distribution penalty

When withdrawing funds from an IRA before age 59 1/2, generally speaking you will incur a 10% penalty in addition to any taxes due on distribution. There are exceptions; you could avoid this rule if withdrawing the money to pay unreimbursed medical expenses that exceed 7.5% of adjusted gross income; similarly if unemployed for 12 weeks using these funds to cover health insurance premiums this penalty could also be waived.

In most instances, it is usually better to let your IRA money grow over time rather than withdraw it early and risk both paying the 10% penalty and potentially missing out on long-term investment growth. Still, before making your decision to make early withdrawals it is wise to carefully weigh its advantages and disadvantages, including taxes and penalties associated with such moves.

Taxes on withdrawals

Understanding the tax rules on IRA withdrawals is vital to effective retirement planning. Withdrawals from traditional, SEP, SIMPLE and certain Roth IRAs are subject to income taxes; you may also incur an early withdrawal penalty if taking funds before age 59 1/2. As the rules can be complex and can significantly impact savings goals, consulting with a financial advisor is highly recommended in order to navigate them more easily.

Early withdrawals from an IRA typically attract tax at ordinary income tax rates and incur a 10% penalty; however, there are exceptions; you can bypass this penalty if using the money for unreimbursed medical expenses that exceed 7.5% of your AGI, while new parents can take up to $5,000 out penalty-free for child birth or adoption costs.

If you own multiple traditional IRAs, aggregating and calculating their required minimum distributions (RMDs) separately is possible. An RMD consists of all previous year contributions and earnings divided by your life expectancy factor.

Investment options

IRA providers provide you with a range of investment options for your retirement account, and may even provide professional investment advice and monitor and rebalance it on an ongoing basis. However, you should also be aware of any investments which cannot be held within an IRA, such as direct real estate ownership or oil and gas interests.

One of the easiest and most efficient ways to save money in an IRA is investing in low-cost index funds. These funds allow you to diversify your portfolio while lowering fees. Target date or asset allocation funds provide even further diversification while automatically managing and rebalancing over time.

If you want to increase your savings, contribute money monthly into an IRA. This will allow it to compound faster – and will eventually create a much larger nest egg when retirement arrives – this strategy is known as dollar cost averaging.

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