In the world of investing, a steady 7-10% annual return is a great way to grow your wealth. Thankfully, this return rate is readily available to most Americans through the Roth IRA account! If you have a Roth IRA, though, you might’ve noticed that you sometimes end up losing money. Before we talk about that, let’s talk about what the Roth IRA is!
Everything You Need to Know About the Roth IRA
Here’s what you need to know about the Roth IRA:
The Roth IRA is an Investment Account
An investment account is something that allows you to make investments. When you open an investment account, you can buy all kinds of investments. However, the Roth IRA is different from regular investment accounts because…
The Roth IRA is a Retirement Account
This means that the Roth IRA was meant for long-term investing. You can’t treat it like a regular investing account where you can withdraw earnings almost whenever you want. That being said, it’s still a smart idea to have one to secure your future.
Want to learn more about the other kinds of retirement accounts? Check out my blog post on the investment accounts you need to know!
There’s no Minimum Contribution
Some investment accounts require a minimum contribution every month. The Roth IRA, however, won’t penalize you if you invest $10 or $1000. You won’t have to worry about Roth IRA penalties if you have a month where you’re barely scraping by.
There’s an Annual Maximum Contribution
You can’t invest too much money into the Roth IRA because there’s a maximum annual contribution. If you’re below the age of 50, you can only contribute a total of $6,000. If you’re over the age of 50, the limit becomes $7,000.
It’s Tax-Free
You read that right! Any money you put into and gain from your Roth IRA investments is completely tax-free. This is what makes investing long-term with a Roth IRA so appealing.
You Can Withdraw Contributions Without a Penalty
Have a tough month where you need money and fast? You can actually withdraw your contributions to your Roth IRA without incurring a penalty. However, this should only be seen as a last-ditch resort, as it’ll be difficult to grow your wealth otherwise. This only applies to money that your contributions, or the money that you’ve already put into your Roth IRA. Earnings from your investment account are a different conversation.
Is Your Roth IRA losing money? Maybe it’s Early Withdrawals
While you can withdraw contributions without incurring any penalties, earnings are a different story. This is the money you receive from your investments through your Roth IRA. If you withdraw your earnings before the age of 59 ½ , you may face a 10% penalty on earnings withdrawn.
There are exceptions to this rule, though. If you’re a first-time homebuyer, you can take money from your Roth IRA without a penalty. This applies if you, or your spouse if you have one, haven’t owned a home in the last two years. You also have to spend your withdrawal in the next 120 days to buy, build, or repair a home.
Another exception is if you suffer from a disability that is total and permanent. This means if you have a condition that leaves you incapable of doing substantial work. You would need a written statement from a doctor confirming the severity of your condition to prove it.
Earnings, though? You may get penalized!
While you can withdraw contributions without incurring any penalties, earnings are a different story. This is the money you receive from your investments through your Roth IRA. If you withdraw your earnings too early, you may be subject to a 10% penalty on any earnings withdrawn.
Is Your Roth IRA Losing Money?
The Roth IRA is a reliable, trusted investment account that many Americans use to save for retirement. However, you can’t just put money into your account and expect it to grow immediately. You can still find yourself losing money with your Roth IRA! Here are eight of the most common reasons this might be the case:
Withdrawal Penalties
You might think a 10% withdrawal penalty isn’t much, but it will add up if you withdraw too often. As a general rule, you should avoid withdrawing from your Roth IRA, even contributions, as much as possible.
Contribution Penalties
While much less common than withdrawal penalties, contribution penalties do exist. If you go over the maximum annual contribution, your contributions will suffer a 6% penalty until withdrawn.
Need an easy way to track how much you’re spending and contributing? Check out my article on the budget binder!
Opening your Roth IRA too late
If you don’t already have a Roth IRA right now, you should know you’re already losing money. The sooner you start contributing to your Roth IRA, the more money you’ll earn because of more years of interest.
Market Volatility
The market dictates how much money you earn from your Roth IRA. Unfortunately, like all investments, your earnings (or losses) are at the mercy of the market. There isn’t much you can do to control your losses in a volatile market.
Too many eggs in one basket
Generally, it’s a good idea to max out your Roth IRA investments. However, this shouldn’t be your only investment. Otherwise, if the market crashes, your earnings crash with it.
Not putting all of your money into a single investment is investing 101. If you want to learn more about investing, you should check out my article on the best books for beginners.
How to Avoid Losing Money With Your Roth IRA
While the market isn’t in your control, a lot of other factors are. Here’s what you should do if you want to keep your Roth IRA from losing money:
Open a Roth IRA ASAP
Don’t have a Roth IRA yet? Open one up ASAP, sis. The longer you keep from doing it, the less money you’ll be earning in the long run. You’re losing money by not having one right now!
If you already have one, make sure you also…
Have a separate Savings Account/Emergency Fund
The worst thing you could do with a Roth IRA is to treat it like a normal savings account. You should already have a built savings account or separate emergency fund before investing. If you’ve already made a contribution to your Roth IRA and an accident happens, you’ll be glad you did.
Diversify Your Investments
This is one of the few ways you can minimize the market’s impacts on your earnings. Spreading your portfolio across different investments will mean that you won’t rely too much on a single market. This advice doesn’t just apply to your Roth IRA but to your investment portfolio in general!
Speaking of advice, if you want more of it you should sign up for the money squad! As a member, you’ll receive personal financial advice sent right to you every week via phone! Signing up is absolutely free and takes just a few seconds, so sign up today!
