According to an article which appeared in the "The Washington Post," during the Great Recession of the early 2000s, Americans lost 39 percent of their net worth. On top of your income and home value, bad economic times can affect your retirement money. Depending on what kind of investments you hold in your Roth individual retirement account, it is possible to lose money in your account.
The Internal Revenue Service puts few restrictions on the types of investments you can hold in your Roth IRA. Other than life insurance and collectibles such as artwork and gemstones, you can invest in everything from ultra-conservative U.S. Treasury bonds to higher-risk investments such as stocks and real estate investment trusts. Investments inside your Roth IRA are exposed to the same risks of gain or loss as your non-retirement investments.
A Down Economy
The type of account you hold your investments in has no effect on how they will perform. During bad economic times, many types of investments suffer, but others may do well. For example, the overall stock market might decline, but some individual stocks may increase in value. While the market price of bonds in your Roth IRA might decline if prevailing interest rates rise, their value will rise to their face value as they near maturity. A poor economy will not result in a loss on certain federally insured products such as FDIC-insured certificates of deposit.
The taxes on investment transactions that occur inside your Roth IRA are deferred until you make a withdrawal of any earnings. If your Roth IRA investments earn interest or dividend payments or you trade securities and generate a capital gain or loss, these earnings are not reported or taxed at that time. You don't report gains or losses on investments in your Roth IRA on a year-to-year basis. Gains are not taxed at all if you withdraw them after they become qualified. This typically happens after you have held your Roth account at least five years and have turned 59 1/2 years old.
Considerations and Recent Reforms
You can only take a tax deduction for a loss in your IRA's value if you liquidate all of the investments and withdrawal all of the money. If your total distributions are less than the total amount of your contributions, you can claim the loss as a miscellaneous deduction when you file your federal income tax return, up until the 2017 tax year. To claim the loss, you must itemize your deductions on IRS Schedule A. The loss is subject to the agency's "2 percent rule," which means you can only deduct the amount of your loss that exceeds 2 percent of your adjusted gross income.
New tax reforms have done away with miscellaneous deductions, effective for tax years 2018 through 2025, so you cannot claim a loss of your IRA's value during this period. You can, however, still claim these losses on your 2017 and prior returns.