Can IRA Money Be Lost?
IRAs are retirement accounts that allow after-tax income to be invested tax-deferred in assets like stocks, bonds and mutual funds – withdrawals are treated as taxable income.
Your IRA investment account could experience losses due to market fluctuation or fees that eat into it.
Loss Deduction
When cashing out an IRA and its withdrawal total is less than its account basis, any loss incurred can be written off on your taxes as a deduction. This only applies to traditional IRAs (not Roth), nondeductible contributions made post tax dollars cannot be written off due to insufficient basis in an IRA account to create such losses; typically liquidating all your accounts of one type (traditional or Roth) would suffice.
Still, itemizing on their taxes would only benefit those able to exceed the standard deduction limit by itemizing losses exceeding it. Before the Tax Cuts and Jobs Act was passed, individuals cashing out an IRA could deduct its full amount including investment losses as miscellaneous itemized deduction on Schedule A; however, that loophole has since been closed by law; generally speaking IRA funds must be distributed prior to reaching age 59 1/2 otherwise they may incur a 10 percent early distribution penalty.
Taxes
Individual retirement accounts (IRAs) offer significant tax advantages, such as the deduction for contributions that reduces income tax in the year they’re made. Withdrawals from traditional IRAs may also be taxed as ordinary income and early withdrawals may incur an additional 10-percent penalty tax.
Roth IRAs don’t typically impose withdrawal penalties; distributions and withdrawals from one are usually tax-free if certain rules are adhered to.
Schwab advises consulting with a qualified CPA, tax attorney or financial planner in making your selection. Withdrawals from an inherited IRA could be subject to different rules than an ordinary IRA withdrawals, so it’s essential that you fully understand which options may affect the amount of taxes due. For example, spreading out withdrawals over several years can reduce overall taxes payable.
Withdrawals
As investment returns fluctuate, your IRA might experience gains or losses. Although this is to be expected, it’s essential that it remains invested according to your long-term goals and risk tolerance.
As an early withdrawal penalty to prevent early accessing of IRA money, the IRS charges an early withdrawal penalty of 10% on top of income taxes due. There are certain exceptions such as paying unreimbursed medical expenses exceeding 7.5% of your adjusted gross income or purchasing your first home.
Rollover IRA funds to another account is also possible, with any transferred amounts remaining in that new account for at least 60 days or they count as taxable distribution (unless you re-deposit within 12 months). Keep in mind that miscellaneous itemized deduction is set to expire by 2025 so your tax professional should help maximize other deductions as much as possible.
Rollovers
Beneficiaries of an inherited IRA must take great care when withdrawing funds from these accounts, or risk paying taxes and incurring penalties as well as forgoing tax-deferred growth potential. Failure to follow rules could result in penalties being assessed against them and losing the ability to grow tax-free growth potential.
As mentioned above, inherited IRAs may be subject to an additional 10% tax penalty if distributed prior to age 59 1/2. However, there are steps beneficiaries can take in order to minimise these taxes and risks.
Direct rollover with your new account provider can often be simpler and safer than indirect ones, beginning by reaching out to the plan administrator who paid you your distribution and asking them to mail or wire funds directly to it – within 60 days or the funds will be considered an early withdrawal and you may incur taxes and penalties on them.
Categorised in: Blog