Why is My IRA Losing Money?
Individual retirement accounts (IRAs) provide tax-advantaged retirement savings vehicles, but the success of your IRA depends on your decisions and contributions.
Time and a disciplined investment strategy can reduce the risk that your IRA will lose money, yet other factors could undermine its performance.
Market Volatility
Market volatility causes sudden price movements that can severely impact your investments. Economic trends and geopolitical events all play a part. A solid financial plan, diversifying assets, dollar cost averaging and keeping an emergency cash reserve are all ways of combatting market volatility to prevent portfolio losses and keep investments safe from future market shifts.
Unexpected economic news, Federal Reserve policy changes and global events can create periods of high market volatility that lead to fear and anxiety among investors, prompting them to liquidate investments at a loss – depleting retirement savings in the process.
Maintaining a diverse portfolio, reducing withdrawals in retirement and understanding tax implications are three strategies to protect savings during periods of high market volatility. Collaborate with a financial professional to create a plan tailored specifically to your goals; they may offer investment advice that reduces risk while managing volatility as well as offering strategies such as tax-loss harvesting that allow you to offset market losses with future gains.
Lack of Diversification
Diversification can help protect investments against major losses, but investors should remember that investing is inherently risky and no single strategy can eliminate all associated risks.
Diversification works by spreading your investments across multiple asset classes such as stocks, bonds, cash and CDs. Each of these asset classes can perform differently during different economic environments and help smooth overall returns; for instance during 2008’s financial crisis banks saw their shares decline while discount retailers and healthcare companies saw increases.
Tax diversification should also be a top priority, with households taking advantage of both traditional and Roth accounts to split their retirement dollars as necessary for their tax situation.
High-income households that may face increases in tax rates could benefit from contributing to a Roth account, but when tax rates are low it might make more sense to contribute via traditional accounts.
Taxes
Contributing tax-deductible funds to an IRA reduces your taxable income in the year of donation and allows it to grow tax deferred (or tax free, depending on its type) until retirement.
SEP IRAs offer self-employed workers and small business owners an alternative retirement savings vehicle that follows similar rules as traditional IRAs; however, contributions must come directly from employers only; contributions cannot exceed 25% of compensation or $69,000 annually in 2024.
Tax loss harvesting is a strategy designed to minimize gains by selling losing positions and using their losses to offset capital gains. The goal of tax loss harvesting is to decrease your taxable income; however, this strategy only works if your itemized deductions surpass the standard deduction amount and are offset by an alternative minimum tax liability.
Fees
Fees can have a dramatic impact on your investment returns. Some are assessed per account regardless of its investment activity (wrap fees); others deducted directly from fund returns (fund expenses).
CBS conducted a study that demonstrated how an American worker investing $4,000 each year into an IRA with an 8 percent return and 1 percent in fees would amass over $822,000 by retirement age, but would only reach 522k with 1.5 percent fees paid out annually.
When investing alternative assets through an IRA, it’s essential to understand the custodial fees for each type of asset. These charges depend on the size of assets in your account and can differ between providers. Furthermore, consider what fees your custodian charges by asset type for periodic administrative costs.
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