Can You Lose Money In A Roth IRA?

By Zach Buchenau

Last Updated: December 31, 2020

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Can you lose money in a Roth IRA? | Be The Budget

Roth IRAs are one of the highest regarded retirement investment options available. And those that put them to use over a long period of time, typically see phenomenal returns. But if you are among the many cautious investors out there, you might be wondering, can you lose money in a Roth IRA?

Yes, you can lose money in a Roth IRA. The most common causes of a loss include: negative market fluctuations, early withdrawal penalties, and an insufficient amount of time to compound. The good news is, the more time you allow a Roth IRA to grow, the less likely you are to lose money.

That said, due to the tax advantages, Roth IRAs are one of the best investment options for retirement. But, as we recommend with any form of investing, it is important for you to educate yourself before you risk any of your hard-earned money. That’s why we’ve put together this guide to help you better understand the role a Roth IRA can play in your retirement strategy, as well as the associated risks.

Let’s get started.

Important: The purpose of this article is to provide you with information on Roth IRAs, and should not be taken as investment advice. We cannot be held liable for any investment decisions you make.

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3 Reasons A Roth IRA Can Lose Money, And How To Avoid Them

In almost every situation, investing comes with risks. The only exception being the guaranteed interest rates in your savings account, or a CD. But let’s be honest, those forms of investing are lucky to even keep up with inflation. And a savings account that earns .01% interest won’t make you rich.

Eventually, if you want to build wealth, you need to get involved in some higher return investments. And by nature, that means you will need to be willing to take some risks. Now, I’m not talking about foolish risks. I’m talking about smart, calculated risks that are very likely to benefit you in the long run; like a Roth IRA.

But even a Roth IRA can lose money if you don’t know what you’re doing. So, in order to help you make the most out of your retirement investments, here are three things that can hurt your Roth IRA earnings, and how to avoid them to the best of your ability.

1. Market Fluctuations

The most obvious way to lose money in a Roth IRA is to withdraw your money when the stock market is down. This is true for any investment.

The solution to this, as you might suspect, is to give your investment more time to ride out the market. But this is easier said than done. This requires discipline and patience. Also, in order to give yourself more time, you will need to have other funds sitting in retirement.

In other words, don’t put all your retirement eggs in one basket. That way, if the investments you hold in your Roth IRA go down, you are more likely to have other investments that didn’t suffer the same decline.

Also, you should not invest in a Roth IRA if you are going to need the money before you reach the required retirement age 59 ½. Your Roth IRA is a long-term investment designed to fund your retirement, not the down payment on a new car, or your next vacation. If your goal is to save money for anything other than retirement, then a Roth IRA is not the proper investment.

2. Early Withdrawal Penalties

The absolute worst thing you can do with your Roth IRA is withdraw money before you reach retirement age. Why? Because in most cases, you will incur a 10% penalty fee. (source)

Now, there are certain exceptions to the withdrawal penalty. For instance, if you lose your job, and need to use the money in your Roth IRA to pay for your health insurance premium, you may withdraw it penalty-free using what’s known as a hardship withdrawal. (source)

However, in most cases, you can expect a penalty. So, in an effort to avoid losing money, do your best to let the money in your Roth IRA sit until you are older than 59 ½. Better yet, wait to take a distribution as long as you can.

3. Insufficient Time To Compound

When it comes to retirement investing, the best thing you can do is to start investing early, continue to invest consistently, and let your money grow for a very long time. We’re talking decades, if possible.

You should expect your investments to have good years and bad years. One year, you might make a 20% return, and the next year, you might lose a little money. But, given enough time, the interest your investments earn will begin to compound and grow at an impressive rate.

Put simply, the more time you give your Roth IRA to grow, the less likely you are to lose money.

Can You Lose All Your Money In A Roth IRA?

Ok, so this is a very unlikely scenario, but technically, yes. If you were to invest all the money in your Roth IRA in a single company, and that company were to go out of business, then you would lose all your money.

That’s why you should diversify your Roth IRA as much as possible by picking investments like mutual funds, or low-cost index funds.

It would be a foolish decision to invest all your retirement in one single company, and losing all your money would be extremely unlikely.

Are Roth IRAs Safe?

Roth IRAs are highly regarded as one of the best — and safest — retirement investment vehicles, because the money you invest in it will grow completely tax-free. This helps you maximize your return, by eliminating the risk of paying higher taxes in the future.

Additionally, Roth IRAs allow you to invest in diversified funds like mutual funds, index funds and ETFs which diversify your investments and help to lower your risk.

Disadvantages Of A Roth IRA

As I said earlier, Roth IRAs are considered one of the best forms of retirement investing. However, just like any investment, there are situations where it might not work out to your advantage. In fact, here are three situations in which a Roth IRA will not work to your advantage over other types of retirement investments.

Future Tax Increases

When you invest in a Roth IRA instead of a (non-Roth) retirement account, like a traditional IRA, or 401(K), you are betting on on taxes increasing over time. Now, that doesn’t necessarily make a Roth IRA a bad investment. It does mean that the up-front tax percentage you paid on the money you put into your Roth IRA was higher than the rate at which you would have had to pull the money out.

That said, I don’t think you will find many people complaining when they take a tax-free retirement distributions from their Roth IRA. Additionally, if you invest in a Roth IRA consistently, year after year, there will be years with higher taxes, and years with lower taxes. So, avoiding a Roth IRA because you think taxes will be lower in retirement than they are now, is more than likely a poor decision.

Low Maximum Contributions

One of the biggest differences between a Roth IRA and other Traditional retirement accounts is the low maximum contribution limit. At the time of writing this article, the maximum yearly contribution any one person can make to a Roth IRA is $6,000; or $7,000 if you are over the age of 50.

Though, that is not a reason to avoid investing in a Roth IRA. Rather, you should maximize your contributions every single year. You might as well get as much out of your Roth IRA as possible.

Income Limits

The third most significant disadvantage of a Roth IRA is that you can only invest in one if your income is below a certain amount. For individuals, at the time of writing this, your income must be below $124,000 per year in order to invest in a Roth IRA. In the case of married couples filing jointly, your income must be below $206,000.

For most people, this will not be a problem. And honestly, if your income is high enough to disqualify you from investing in a Roth IRA, that is a good problem to have.

Should I take money from IRA to pay off debt? In general, it is not a good idea to pull money from your IRA in order to pay off debt. In fact, taking an early withdrawal from any retirement investments may incur taxes and additional penalties that will end up costing you more than the interest you are paying toward debt.

Can I take a hardship withdrawal for credit card debt? No, according to the IRS, withdrawing money from retirement to pay off credit card debt will not likely qualify for a hardship withdrawal. Rather, you may only take a hardship withdrawal in the event of an “immediate and heavy financial need,” like paying for health insurance after losing your job.

Can you lose money in a Roth IRA? Plus a few other things you should know | Be The Budget

Zach Buchenau

About The Author:

Zach Buchenau is a self-proclaimed personal finance nerd. When he isn't writing about budgeting, getting out of debt, making extra money, and living a frugal life, you can find him building furniture, fly fishing, or developing websites. He is the co-founder of BeTheBudget, and Chipotle's most loyal customer.

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    1. Hi Carolyn,
      As long as you meet the requirements for a Roth IRA, it’s never too late to start!
      That said, if you’re concerned about it, I highly recommend talking to a financial advisor.

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