Part of the appeal of the Roth Individual Retirement Arrangement (IRA) is you can sock money away for retirement after tax. You won't owe any taxes at all when it's time to withdraw the money. But, those tax advantages come with a certain bit of risk, especially if you invest in assets subject to market whims. That means a poor economy can make the Roth less valuable.
Impact of Economy
The Great Recession that started in 2007 gives you a good picture of the negative affect the economy can have on a Roth IRA. The median value of retirement accounts based in stocks fell 7 percent between 2007 and 2010 according to the "Washington Post." That's a blow to investors since, when the economy does well, many stocks have a return of around 10 percent, according to CNN Money.
If you look at the fine print of companies that offer IRAs, you'll notice the disclaimer "all investments are subject to risk." Roth values drop when stock values drop. The same is true if you invest in a mutual fund or an exchange traded fund. There's no one to insure your initial investment for many of the investment choices you have with an IRA.
Certificate of Deposit
You can put your money in a Roth IRA certificate of deposit. A Roth IRA CD is federally insured, so the money is protected even in the extreme case of a bank crash. The trade off is a CD usually doesn't earn as much as other investments, and its interest rate will be low in a bad economy. The value won't drop, but it won't net you much in the end.
Since you've already paid the tax on the amount in a Roth IRA, it might seem as though you should be able to deduct what you lose in a bad economy. You can, but you'll have to close out the entire Roth first, according to Turbo Tax. You can claim the loss as a miscellaneous deduction on Schedule A, but only if it's more than 2 percent of your adjusted gross income.
- Washington Post: Americans Saw Wealth Plummet 40 Percent Between 2007 and 2010
- Vanguard: IRA Overview
- TurboTax: Are Losses on an Roth IRA Tax Deductible?
- Retire My Way: Open an IRA
- IRS: Retirement Plan FAQs Regarding IRAs
- The Atlantic: The Recession's Toll: How Middle Class Wealth Collapsed to a 40 Year Low
- CNN Money: Tips for Investing in Stocks