Can the Company You've Invested Your Roth IRA in Lose All Your Money in Stocks?

If you want to take a hands-on approach to your own retirement investments, you might consider contributing to a self-directed Roth individual retirement account. Custodians who handle self-directed IRAs let you invest your money in almost anything you want that is not prohibited by Internal Revenue Service regulations. You could use your Roth IRA to make big profits in the stock market. The trade-off for this freedom is the potential loss of your investment money.

Custodial Account

All Roth IRAs are custodial or trustee accounts. The IRS determines what kind of organization can act as a custodian or trustee. Your Roth IRA custodian could be a federally-insured bank, credit union, or savings and loan association. Insurance companies, mutual fund companies and investment brokerage firms can serve as Roth IRA custodians. Some IRA custodians limit the types of investments they will allow you to make, others do not. If you want to invest in stocks, you must open your Roth IRA with a custodian or trustee that permits that type of investment activity.

Risk Vs. Reward

You could invest all of your Roth IRA money in U.S. Treasury securities, or you could use your funds to buy an FDIC-insured bank certificate of deposit. Both of those financial products offer safety of your principal and even give you a little growth through interest payments. If you want a higher return on your money, you'll typically have to take higher risks. Investments in the stock market are attractive because you have the potential to earn money through both dividend income and capital appreciation if your stocks increase in value. On the downside, there is no guarantee your stocks will increase or that they will pay dividends. Your stocks could decrease in value, leaving you with a loss.

Worst Case Scenario

While it is possible for a company to go bankrupt and its common stock to become worthless, it is unlikely that every company represented by a properly diversified portfolio of stock investments would go bankrupt. In the same way, if you invest all of your Roth IRA money in a single stock, and that company goes bankrupt, it is possible you could lose all of your money. Even a properly diversified stock portfolio can lose a significant portion of its value in a short period of time during adverse economic conditions. But over the long term, stock investments tend to return strong positive results.

Tax Consequences

In most cases as far as the IRS is concerned, what happens in your Roth IRA, stays in your Roth IRA. That is, all of the investment results in your Roth IRA occur without tax consequences as long as the money stays in your Roth IRA. There is one exception. If you have an overall loss in your Roth IRA, you can deduct a portion of that loss when you file your federal income tax return. You'll have to itemize your deductions and include your Roth IRA loss as a miscellaneous deduction, which is subject to the 2 percent rule. You can only deduct the amount of your loss that exceeds 2 percent of your adjusted gross income. Before you can take the deduction you will first have to liquidate all of your Roth accounts. If you have multiple custodians for different investments, you can't deduct a loss in one if you have a higher profit in another.