What happens if you lose money with your ROTH IRA Account?

[Guest Groundid]

I was just wondering, If I buy and sell stocks with my Roth IRA account what happens if I lose money? For example, if in the year 2004 I have lost money by trading using the money in my Roth IRA Account, do I claim that as a capital loss for 2004? Also what happen if I make that money back and then some in 2005? I know I'm not taxed on it if I make money but what happens to the money in your Roth IRA account if you lose more money then you put in?

Any help is appreciated. Thank you!!

[david rigby]

I know I'm not taxed on it if I make money...

You aren't taxed on it if it loses investment value either.

[Guest ERISA_kid]

The sale of assets held in IRAs (including Roth IRAs) is not subject to capital gains treatment. Alternatively, the distribution of funds from the IRA is generally what triggers taxation. However, if you distribute all the balances in your IRAs and the total amounts distributed are less than your basis in the IRAs (i.e. your after-tax contributions to the IRAs), you may be able to deduct the difference in excess of 2% of your AGI as an itemized deduction on your tax return. According to IRS Publication 590, this treatment is available for losses in Roth IRAs. In fact, I just claimed this deduction myself on my 2003 return when I closed out my Roth IRA. Check out IRS Publication 590.

[John G]

For most folks, I think the answer is that you soldier on. Unless your losses are extraordinary... like a few folks who road the dot.com craze until they were wiped out... were it might make sense to close out your accounts and take the lose.

But, once you have built substantial assets you would not typically do that because of one bad year. It would be like starting from scratch to assemble tax sheltered assets.

If you have a balanced portfolio or broadly based mutual funds, it is rare to have a long down stretch. We just came out of one that ran slightly over 2 years. That has happened I believe just three times in the past 90 years.

[Guest Groundid]

Thanks for all the replies everyone!

I was trying to figure out what to do with the money in my ROTH IRA account specifically. When I first started investing I had no idea what I was doing so I just bought some stocks for my ROTH IRA account. I had no idea you could just leave the money in there ...I thought you had to buy something whenever you contributed your yearly monies to the account. So my situation now is that I have 3 stocks worth $5,899.28 but with a Total Market Value of $4,212.07.

I was really just thinking about selling the 3 stocks and buying mutual funds instead since that seems to be the general concensus on here on what to do. But I was really wondering if I could write off that -$1,687.21 loss from my taxes for 2004.

[John G]

1. You can't write off losses in a Roth or regular IRA account in the same way you do with taxable accounts. While you can close all your IRAs and then claim the loss, that just wouldn't make a lot of sense for the numbers you posted.

2. Consider this loss as one of the many times you will pay "Tuition" while your are learning about investing. You probably paid out a lot more for college credits that you may never use.

3. There are no instant great investors. There are no perfect solutions to investing that always work. Building up investing knowledge is a multi-year process.

4. I suggest that you start a program of spending 1 hour per week reading.... Kiplinger Financial, Worth, Money, or the Wall St Journal. That's four hours per month ~ you will be amazed what you will learn in a year.

5. What are the three stocks? Why did you buy them? What do you know about the companies? Post again on this and I will give you some suggestions... it is not clear that you should change course just because of a short term result.

6. Be prepared that your Roth will go up and down in value. Think long term. Do not make changes based upon short term events.

7. I would have started you out with NO LOAD mutual funds. Anyone with less than 30k (some would say 50k) can not invest in single stocks efficiently. It is hard to get a diverse portfolio. Research stocks takes a lot of time, and more time to track your holdings. Even with internet trading, transaction costs are too large.

[Guest Groundid]

Hi John,

Thanks for the reply. This is an excellent site and I have already learned so much just by reading posts from alot of helpful people here such as yourself.

The stocks that I currently have in my Roth IRA account are:

----------Quantity--Market Price--Market Value--Avg Cost Share----Cost----Gain Loss-----% + or -

-AMGN-------40-------56.41-------2,256.40---------48.06---------1,922.50-------(+333.90)---(+17.37)

-HD-----------39-------35.19-------1,372.41---------51.27---------1,999.53-------(-627.12)----(-31.36)

-MU----------215------13.62-------2,928.30----------14.50---------3,117.50-------(-189.20)-----(-6.07)

-SUNW------104--------3.90---------405.60----------19.01---------1,977.25-----(-1,571.65)----(-79.49)

The reason I bought them was mostly from my father telling me to buy stocks and put them in a Roth IRA account. I really didn't know what I was doing when I opened a Roth IRA account other then listening to my father but it turns out he knows less then I do about investing so I'm trying to learn as much as I can and get on the right track.

I realize now that mutual funds would probably be the way to go in my particular situation and I wish I would have known that instead randomly picking stocks. I plan on keeping what I put into my Roth until I am past 60 years old. Are there any particular mutual funds that you would recommend? Also, do most people hang on to mutual funds for a long period of time or is it common to buy and sell into other mutual funds after a while? Any help is appreciated and thanks again for the response.

P.S. I did happen to sign up to Kiplinger's magazine the other day. So many people have suggested it here that it seems like a really good source of information.

[ElGuapo]

What to do . . . basically it works like this--nobody likes to sell a stock that's down because at some level it's an affirmation that you screwed up. This is true even in a taxable account where there's a tax incentive to sell. In your Roth, the gain or loss you have in each stock has no significance whatsoever, so the best thing you could do is ignore it.

This is probably hard advice to take, but I think you should forget everything about what you paid for each stock--because there is no rule out there that says because a stock has once traded at $19 a share it will soon (or ever) get back to that level. (I should point out here that I don't follow Amgen, Home Depot, Micron, or Sun personally, so don't take this as a vote for or against any of them.)

What I am suggesting is that you do your best to look forward and ask yourself Would I buy this stock today? If not, and if the transaction costs are low enough, it's time to dump that stock in favor of a broad-based mutual fund. Write it off to education expense, just like the rest of us did.

As for your last question about what fund to buy, who is your Roth account set up with? Most discount brokerages have a vast number of funds available. Be sure to pick a no-load fund that covers the broad market--names like "Index," "Growth and Income," or an asset allocation fund are probably what you'd start with.

[Guest Groundid]

Hi ty07480,

thanks for the reply. My Roth IRA account right now is setup through ameritrade.com. I believe there is a way to check for no load mutual funds that they support but I just need to find it.

[John G]

Sun, Micron, Home Depot and Amgen - while I don't follow these companies, they are well known names and the bias is toward large "cap" (capitalization ~ large size firms) and toward growth. The stock prices of these four have been moving sideways for much of the past year. Frankly, you might want to just keep them and continue to monitor how they perform. I agree with much of what TY has posted. Yes, you could sell them all off if your commission structure is low... but you might learn more by keeping them and learning about these 4 companies.

Additional contributions should probably go into mutual funds. There are thousands but you only need one. First, I would only look at NO LOAD funds ~ these have no front end or exit commissions. Second, I would select only from funds that have annual expenses below 1% as expenses erode fund performance. Third, I would choose a broad based fund ~ something that invests across all industries. Because of your long holding period, slanting the investment slightly towards growth is a good idea. No hyper growth, but a little more computer/med devices/software/telecom etc. rather than railroads, basic metals, paper and utilities. You need to see what kinds of funds Ameritrade supports ~ look at their website and use the search capability. One class of funds that will generally meet all of the above characteristics will be INDEX funds. Index funds are based upon some "list" (like the S&P 500, all NYSE companies, the 5000 largest firms, etc.) and use a personal computer to make buy/sell decisions. That means there are no field visits, no "analysts" and less portfolio turnover.... all of which leads to very low annual costs (often well below 0.5% per year). Consumer Reports, Kiplinger, Worth and Money often run articles on various mutual funds. Don't chase the top performer ~ it often performs poorly in the following year. But, do consider the objective or focus and 5 or 10+ years of performance (while no guarentee of future success) sets a benchmark of what you should expect.

Ameritrade says this:

"Mutual Funds Ameritrade offers more than 11,000 mutual funds, including major fund families such as Vanguard, Franklin, Janus and Putnam. This diverse offering covers an array of investment objectives, goals and strategies — so you're sure to find a fund that fits your investment needs." I think as an accountholder you will see more info than I do as a visitor.

Again... don't worry about your short term success. While it is nice to see your portfolio gains, what you are learning about investing is a lot more important for the long haul.