An Individual Retirement Account is a type of tax advantaged account intended to help you save for retirement. IRAs can be held in many different types of investments, and some of these investments might lose value. While it is an unlikely scenario, you could lose the entire balance of your IRA account. With proper planning, you can minimize your risk of your IRA going belly-up, and also take advantage of some potential tax breaks if your IRA loses value compared with its tax basis.
Preventing Total Loss
The most likely way to lose all of the money in your IRA is by having the entire balance of your account invested in one individual stock or bond investment, and that investment becoming worthless by that company going out of business. You can prevent a total-loss IRA scenario such as this by diversifying your account. Either invest in mutual funds that hold stocks or bonds, or invest in many different individual stocks or bonds. If one individual investment loses all of its value, the others are likely to keep value, preserving some, if not most, of the value in your account.
Deductible Losses -- Traditional IRA
A traditional IRA only has a tax basis if you have made nondeductible contributions to the account. Most often, you would deduct contributions that you make to a traditional IRA, unless you did not qualify for deductible contributions. Any nondeductible contributions count toward the tax basis of the IRA, and if you liquidate all of your traditional IRA accounts and receive less than the tax basis of the accounts, you can deduct the loss as a miscellaneous itemized deduction on Schedule A, to the extent that the loss exceeds 2 percent of your adjusted gross income.
Deductible Losses -- Roth IRA
A Roth IRA is more likely to give you a tax deduction if it loses money. By nature, all Roth IRA contributions are on an after-tax basis, which means that all Roth contributions contribute to the tax basis of your Roth accounts. If you liquidate all of your Roth IRA accounts, the amount that the proceeds are less than the total of your contributions minus any withdrawals is the tax-deductible loss. Add this loss in with your other miscellaneous itemized deductions from Schedule A, and the amount that is more than 2 percent of your adjusted gross income is deductible as an itemized deduction.
If you converted a traditional IRA to a Roth account, you might be able to recharacterize the IRA back to a traditional IRA if the account loses money. This could be a good move because you must pay taxes on a traditional IRA when you convert it to a Roth. If the Roth account later loses money, you have paid taxes on a value that is no longer in the account. By recharacterizing, you can possibly get a refund of the taxes that you paid when you converted the account. You must recharacterize the IRA by Oct. 15 of the year after you made the initial conversion and file an amended tax return to claim a refund.
Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.