Individual Retirement Accounts (IRAs) give investors greater flexibility. Investors can select investments such as real estate, stocks, mutual funds and ETFs for an IRA investment portfolio.
However, IRA assets are subject to market risks just like any other investment account; investors could lose money if the stock market swings wildly between ups and downs during short timeframes.
Loss of Value
Asset values held within IRA accounts may decrease for many reasons. An investment loss may be even greater in accounts that contain assets with significant appreciation over time – like stocks.
Investment losses may arise if you have invested your IRA funds into stocks that have underperformed or experienced market volatility, yet history shows that investing in the stock market typically provides greater returns over investing in government securities such as T-bills or bonds.
Before reporting any IRA losses on your tax return, all investments within it must first be cashed out – this applies both for traditional IRAs and Roth IRAs, SIMPLE IRAs, SEP IRAs and self-employed business owner retirement plans (SBERPs). Spousal beneficiaries who wish to keep an inherited IRA intact should prioritize withdrawing funds from accounts with losses before withdrawing funds from nondeductible or even deductible IRAs in order to minimize penalties.
Loss of Tax Deductibility
As one might anticipate, Uncle Sam won’t permit you to deduct losses in your IRA accounts due to their mixture of tax-deferred contributions and untaxed investment earnings. To claim loss deduction, however, you would have to liquidate your entire account, which might prove inconvenient if your long-term asset allocation goals involve shifting money between IRAs.
As with nondeductible IRA contributions, since those dollars were contributed after-tax. When withdrawing investment earnings from either a traditional or Roth IRA however, any earnings will incur ordinary income tax even though you never paid taxes on them at all.
TCJA is scheduled to expire by the end of 2025; however, Congress could extend miscellaneous itemized deductions that allow you to deduct losses from an IRA. Even without such relief from Congress, it’s generally more beneficial for you to focus on saving for retirement over multiple decades than being unduly alarmed when an investment declines significantly in an IRA.
Loss of Interest Income
Prior to the Tax Cuts and Job Act (TCJA), it was possible to deduct up to 2% of your AGI for IRA losses; these could only be deducted if they were itemized and reported on Schedule A as such losses – not non-IRA losses.
Tax-deduction of retirement account losses is only possible when all the funds in an IRA have been cashed out and there’s basis (nondeductible funds from traditional IRA accounts or Roth IRA contributions), and conversion is in order.
Investors can still utilize IRA investment strategies to meet both tax and investing goals. Although IRA rules discourage collectible investments, certain highly refined bullion and coins (along with certain other tangible personal property) may still be held within an IRA for redeposit without incurring tax upon sale – provided they adhere to either the 60-day rule for recharacterizations or the 10% early distribution penalty.
Loss of Tax Deferral
Cashing out an IRA account has its drawbacks; once you withdraw assets, they’re gone permanently. Although an inherited IRA might experience decrease in value over time, it’s usually best to leave them intact so as to maintain tax deferral on any future gains.
Beneficiaries should carefully monitor their inherited IRAs and verify all information found on their self-directed IRA custodian statements, such as prices and asset values. Beneficiaries should take particular note when managing alternative investments, which can often be difficult or intangible assets that fraudulent promoters misrepresent as having fair prices.
Contrary to taxable accounts, which allow investors to take advantage of investment losses to lower their taxes, IRAs typically carry a 10% penalty for early withdrawals outside special circumstances – this way the IRS encourages people to leave their retirement savings in place as long as possible. Furthermore, Senate tax reform proposal eliminates miscellaneous itemized deduction for IRA losses altogether.