Can IRA Money Be Lost?
Individual Retirement Accounts (IRAs) can be an effective tool to save for the future, yet as with all investments they may lose value due to market fluctuations, fees associated with investments or withdrawals early.
If your traditional IRA accounts have lost value, and they can all be reclassified as gains to achieve tax benefits, it may be possible to recharacterize their losses as gains and enjoy tax breaks.
Individual retirement accounts, or IRAs, are tax-advantaged investments designed to help individuals save for retirement. There are various kinds of IRAs – traditional, Roth and Simplified Employee Pension plans for small business owners (SEP IRAs).
As with any investment, an IRA may suffer losses. The amount depends on how the account is invested and market conditions.
Diversifying an IRA’s investment mix tends to reduce its chances of value loss, due to having stocks, bonds and other asset classes that act differently during volatile markets.
When investing for retirement, keeping most of your IRA in stock funds may make the most sense; just bear with the economy’s ups and downs for now. But once closer to retiring age arrives, diversifying into safer investments such as bonds could help ensure your account doesn’t expand rapidly if the market booms while it also doesn’t contract rapidly if markets suffer setbacks.
Withdrawals from IRAs are taxed as ordinary income depending on your age and whether or not contributions were made with pretax or after-tax funds. The IRS has rules to determine what portion of any withdrawal is taxable, as well as impose an early withdrawal penalty if funds are withdrawn prior to age 59 1/2.
Tax payments can be reduced through an Individual Retirement Account deduction that’s tied to your income eligibility. Traditional IRAs allow anyone with earned income to contribute; Roth IRAs only accept those who are self-employed or who have other types of qualified income such as rental property rental income and business profits.
Low and middle income savers may qualify for the Saver’s Credit, which reduces taxes by 50%, 20% or 10% depending on filing status and adjusted gross income. You could get even greater tax breaks by contributing to an employer-sponsored retirement plan like 401(k), simplified employee pension (SEP) or cash balance plan.
IRAs are designed to offer tax benefits and investment growth, yet any funds withdrawn may be subject to taxes, penalties and other requirements.
At best, withdrawing an IRA should only be done as a last resort; its potential costs may not outweigh its penalties or tax implications depending on your specific circumstances.
Withdrawals of employee contributions (not earnings) may only be approved for specific uses such as home purchases, medical bills or unexpected events. Before taking any actions to withdraw these funds from your 401K plan, consult with a tax professional first.
Withdrawals from traditional, rollover or SIMPLE IRAs are treated differently from withdrawals from Roth IRAs due to their taxable status. When withdrawing funds from nondeductible IRAs first before tapping any deductible ones; that way you won’t risk forfeiting valuable tax deductions that won’t easily be replaced. Also be sure that beneficiaries for each of your accounts remain up-to-date to ensure your wishes are carried out smoothly.
An individual retirement account can only grow as fast as its investments do. Stocks typically outperform CDs over time; however, due to higher levels of volatility they do pose more risk.
fees – which can quickly accumulate – can quickly add up over time, according to CBS. Even seemingly minor charges can eat away at your returns from investments.
When selecting an IRA provider, look for one with low or no fees to manage your retirement account. For instance, Firstrade, which is popular among active traders, provides commission-free trading on numerous assets as well as Roth, SIMPLE and SEP IRA options. In addition, Schwab Intelligent Portfolios robo-advisory service manages accounts for just $30 annually per household – or waived completely when households own Wells Fargo bank checking or brokerage accounts or private banking relationships exist within their household – in addition to being waived entirely when having balances of $250,000+ in their IRA accounts.
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