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If you’ve started investing for retirement – or know that you should – the question of whether you can lose money in a Roth IRA is a good one to ask.

After all, asking questions like this shows that you’re planning out your retirement strategy, which is something that, frankly, more people should be doing.

This is why we’ll show you the answer to this and much more, including whether your Roth IRA is safe and what to do if your Roth IRA is losing money – as well as what’s far, far riskier than what this account can offer you.

And with this information, you’ll be fully armed to start putting yourself on the path to financial security for your retirement.

Can you lose money in a Roth IRA?

You can lose money in a Roth IRA, with the most frequent reasons for this being dips in the market, penalties for early withdrawal or not giving your money sufficient time to compound in value. However, you can reduce the risk of most of these occurring simply by diversifying and leaving your money in your account for as long as possible.

And despite the possibility of losing money, investing in a Roth IRA is still one of the best decisions you can make when figuring out how to set yourself up for retirement. While what works for you is going to depend on your individual circumstances (and is why you should definitely do your own research), the tax advantages offered by the Roth IRA make it a good idea for a lot of people.

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Can you lose money in a traditional IRA?

You can lose money in a traditional IRA at times when the market drops, if you receive an early withdrawal penalty or when you don’t give your investment sufficient time to compound. However, the risk of these happening can be mitigated simply by leaving your money in your account for as long as you can.

So, essentially, it’s exactly the same answer to the question of whether you can lose money in a Roth IRA – and basically any other type of investment where your goal is to invest for the long term.

Related: How to Invest $25k: 13 Strategies to Grow Your Wealth

Why might you lose money in a Roth IRA?

We mentioned earlier a few ways that you can lose money in a Roth IRA, but it’s worth looking at each of the reasons in more detail.

1. Selling when there’s a dip in the market

Any sort of investment is going to go up and down in value over time. But the one thing to keep in mind is that you don’t actually lose money when it drops in value until you sell and lock in your loss.

And the same applies here. That is, you can only lose money in a Roth IRA if you withdraw your money when it’s at a lower value than when you put it in.

Sure, seeing your investment go down when you hoped it would skyrocket isn’t fun. But history has shown that the market does, on average, always go up. This is why holding for as long as you can is key to riding out any short term volatile periods.

2. Not giving your money enough time to compound in value

This relates to the first reason we just mentioned, in that if you don’t leave your money in your account for long enough, you’re not giving it the chance to grow.

Compound interest is truly the key to building your wealth – but it does take some time for it to really work its magic. This is also why the consistent advice is to start investing as early as possible as the longer your money has to build upon itself, the better off you’ll be once you reach retirement.

But this also gives you time to ride out any dips. In years where market performance isn’t as strong, your investment clearly won’t grow as much as it otherwise would – and can even drop overall.

However, by having some patience (and some nerves), it will go up again, giving your investment the chance to make up for those less-than-stellar years. If you withdraw your money before your investment has the chance to make up for that lost time, it’s very possible that you’ll lose money in your Roth IRA.

3. Being penalised for early withdrawal

You can only withdraw from a Roth IRA when you’re at least 59½ years old and when it’s been at least five years since your first contribution to a Roth IRA.

This means that you can lose money in a Roth IRA if you withdraw earlier than this, as you’ll likely be hit with a 10% penalty in addition to any taxes that apply.

There are some exceptions, particularly in the case of what’s known as a “hardship withdrawal”, although your plan does have to state that this is allowed for you to do this penalty-free.

This only applies in certain circumstances, such as if you lose your job, and can only be used for certain expenses which are listed here. This includes things like medical expenses and payments necessary to avoid being evicted.

But if you meet one of these criteria, you may be eligible for early withdrawal without any penalties applying – although you’ll still have to pay any taxes owed on the amount you withdraw

Can you lose all your money in an IRA?

You can theoretically lose all your money in an IRA if you choose to invest all the funds in your account only in shares of individual companies. In that situation, if those companies were to go bankrupt, you would lose all your money.

That said, most people select to invest their IRA funds in a more diversified range of options, such as stocks, bonds, index funds or mutual funds.

By having this diversification, you’re making it much less likely that you’ll lose money in your Roth IRA as even if one asset class underperforms, the others will be there to balance this out.

You can also further reduce the risk of losing all your money by sticking to investing in things like index funds, where it’s basically impossible for this to happen. This is because they work by tracking segments of the market (or even the entire stock market, in some cases).

Let’s take an index fund that tracks the S&P 500, for example, which follows the performance of the 500 largest companies on the US stock exchange. If a company on that list goes bankrupt, it will simply drop out of the top 500 and the next one in line will take its position.

This means that while the value of your investment may drop if this were to happen, there’s basically no chance that you can lose all your money in a Roth IRA that invests in index funds.

What to do if your IRA is losing money

If your IRA is losing money, your first step should be to look at the reason why to address this accordingly. It may simply be a case of the market having dropped, in which case riding it out is usually the best response.

Another way to respond to this is to look into diversifying your investments more. This is particularly the case if your entire IRA is in one type of investment, such as an index fund. While these have historically performed very strongly over time, they can also be quite volatile. If you don’t think you can stomach these ups and downs, allocating some of your investment to a more stable option, like bons, could be a good idea.

You should also check that the fees on your IRA are reasonable. When asking if you can lose money in a Roth IRA, Reddit has some great examples of when this can happen – and when you should withdraw. This person, for instance, got put into a Roth IRA with pretty terrible fees and where the value of their account ended up being less than what they put in.

In that situation, Reddit experts correctly note that you won’t get charged a penalty if your withdrawal is less than the cumulative amount you put in. When combined with the high fees, that’s probably a good time to withdraw.

But in most cases, stick it out and your Roth IRA will, in almost all cases, go back up eventually.

Related: How to Invest and Make Money Daily: 7 Proven Strategies

Can I stop contributing to my Roth IRA if it’s losing money?

You can stop contributing to your Roth IRA at any time as there is no minimum contribution requirement. Simply keeping the account open will ensure that it continues to move towards the five-year requirement.

That said, if you’ve got a Roth IRA losing money, this may not be a good enough reason alone for you to stop contributing towards it. Specifically, it goes against the concept of what’s called “dollar cost averaging”.

Dollar cost averaging is when you continue to invest roughly the same amount, no matter how the investment is performing. This means that if, say, you have $1,000 to invest every month, you will add this to your Roth IRA if it’s losing money or if it’s value is sky high.

The idea behind this is that you’re averaging out the risk you face. Ideally, we’d all invest when the market is at a low and sell when it’s at a high. Unfortunately, none of us have a crystal ball and thus dollar cost averaging looks to flatten this out by making sure you’re buying no matter where the market is at on its current curve.

So while you can stop contributing to your Roth IRA if it’s losing money, this may not be the best idea overall for your long term retirement strategy. Doing your own calculations and figuring out your risk appetite is key, however, for determining the best way forward for you.

What is the downside of a Roth IRA?

While Roth IRAs can be a great investment strategy for those looking for a tax advantaged place to put their money in preparation for retirement, there can be some disadvantages to having a Roth IRA for certain people. These include:

1. You can’t contribute to a Roth IRA if you earn too much money

This could probably fall under the category of “good problems to have”, but you can only contribute to a Roth IRA if your income is below the relevant limit.

The exact limit is going to depend on things like your marital status and whether you file your taxes separately or jointly. These limits start at $124,000 although you can check here for the amount that applies to you.

2. Only your Roth IRA withdrawals are tax-free, not your initial contributions 

This isn’t going to be a downside of a Roth IRA for everyone, but it is a consideration, especially if you think your earnings will be more in retirement than they are now.

This is actually one of the major differences between a Roth IRA and a traditional IRA. With traditional IRAs, you get a tax break the year you make your contributions – although you’ll then be on the hook for paying taxes on your withdrawals when you retire.

The right decision here is going to very much depend on your individual circumstances, so it’s worth finding a Roth IRA calculator online to do the math compared to a traditional IRA.

3. The withdrawal rules are strict

We went through this above, but just to touch on it again: with a few limited exceptions, you can only withdraw from your Roth IRA tax-free and penalty-free when you’ve reached 59½ years of age and when you’ve had your Roth IRA for at least five years.

This may be problematic if you intend to retire before that age and may need to access these funds earlier. This could also be an issue if you start your Roth IRA when you’re in your mid-50s or later, as you’ll have to wait for the five-year period to run before using these funds.

Are Roth IRAs safe?

While all investments carry some element of risk, Roth IRAs are a very safe way to invest for retirement. It is, however, always a good idea to take the steps needed to mitigate any risks to your investment.

For example, diversifying your investments is always a good idea to balance out any downturns in the market. This is particularly the case if you plan to invest all the money in your Roth IRA in the stock market, which can expose you to some pretty serious volatility.

At the same time, it’s also not safe to be too conservative as you could cost yourself the returns that some of the slightly riskier investments can offer. For example, while your money will definitely be safe if you keep it all in bonds, you’ll be missing out on the stronger returns that the market offers over time which, by the time you hit retirement age, could mean the difference between whether you have enough money or not.

Even the best Roth IRA will see your funds go up and down in value, but this doesn’t mean that it isn’t safe. It is, however, why diversification and holding on throughout the peaks and troughs are always good strategies when it comes to any investment.

Is Roth IRA money guaranteed?

The Securities Investor Protection Corporation (SIPC) provides insurance of up to $500,000 per brokerage account, including up to $250,000 in cash. Many of these accounts also often have their own additional insurance to cover you for losses in excess of the SIPC limit.

It’s a good idea to check with the company administering your Roth IRA on what insurance coverage is in place over your funds, so you can sleep easily knowing your Roth IRA money is guaranteed, at least up to a point.

And just to clarify, SIPC doesn’t cover you for any losses you incur if your investments lose any of their value. Instead, it provides cover if the brokerage firm managing your Roth IRA goes into liquidation.

You can find out more here.

Final thoughts on losing money in a Roth IRA

No investment is failsafe, but it’s even riskier to not invest at all when preparing for retirement.

This is because you’ll be losing out on the hundreds of thousands of dollars you can earn simply by leaving your money to compound in value over time. It’s not hard to see how this could make or break your entire retirement.

And while it’s true that you can lose money in a Roth IRA, the risk of this happening is significantly lessened by taking a few simple steps when setting up your retirement strategy.

That is, by diversifying your investments, investing regularly, holding your nerve during any market downturns and being aware of the withdrawal rules that apply to your account, it’s very likely that you’ll end up better off than when you first opened your Roth IRA.

After all, history has shown that the market does, on average, go up. And while past performance is no guarantee of future performance, this may very well be a risk worth taking in order to secure your financial future.

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