What to Do If Your IRA Is Losing Money: Key Steps to Take

Seeing your IRA lose value can be unsettling, but market fluctuations are a normal part of investing. While short-term losses may cause concern, making impulsive decisions could lead to bigger financial setbacks. A strategic approach can help protect and potentially recover your retirement savings.

Asset Allocation Decisions

How your IRA is allocated across asset classes determines its performance during market downturns. A portfolio heavily weighted in stocks may see sharp declines, while one concentrated in bonds or cash equivalents might struggle to outpace inflation. Balancing growth and stability helps manage volatility.

Diversification reduces risk by spreading investments across sectors, industries, and asset types. If your IRA is concentrated in technology stocks, a downturn in that sector could significantly erode savings. Adding assets like dividend-paying stocks, real estate investment trusts (REITs), or Treasury Inflation-Protected Securities (TIPS) can provide stability.

Your age and retirement timeline should also guide allocation decisions. Investors in their 30s or 40s may afford more risk with a higher percentage of equities, while those nearing retirement might benefit from shifting toward income-generating assets. Target-date funds adjust allocations over time, reducing exposure to riskier investments as retirement approaches.

Checking for Hidden Costs

Investment losses in an IRA can be worsened by fees that erode returns. Many investors focus on market performance but overlook administrative charges, fund expense ratios, and transaction costs.

Mutual funds and exchange-traded funds (ETFs) have expense ratios covering management fees and operational costs. Index funds typically charge below 0.10%, while actively managed funds can exceed 1% annually. On a $100,000 investment, a 1% fee amounts to $1,000 per year, compounding over time. Reviewing fund prospectuses and opting for lower-cost alternatives can help reduce expenses.

Frequent trading within an IRA can lead to high transaction fees. Some brokerage platforms charge commissions, while others impose fees for purchasing certain mutual funds. Choosing commission-free ETFs or low-cost mutual funds can help minimize costs. Additionally, some custodians charge annual maintenance fees or require minimum balances, which, if unmet, result in penalties. Comparing IRA providers and switching to a more cost-effective platform may be worthwhile.

Advisory fees are another potential drain on returns. Financial advisors managing IRAs typically charge a flat fee or a percentage of assets, often ranging from 0.25% to 1%. While professional guidance can be valuable, investors should assess whether the service justifies the cost. Robo-advisors, which use algorithms to manage portfolios, offer lower-cost alternatives with fees as low as 0.15%.

Considering Distribution Timing

The timing of IRA withdrawals affects both the longevity of retirement savings and tax liabilities. Withdrawing funds during a market downturn locks in losses and reduces recovery potential when markets rebound. This is particularly important for traditional IRAs, where distributions are taxed as ordinary income and could push retirees into higher tax brackets if withdrawals are too large in a single year.

Required Minimum Distributions (RMDs) add complexity. Starting at age 73 in 2024, traditional IRA holders must take mandatory withdrawals based on IRS life expectancy tables. Failing to withdraw the required amount results in a penalty—25% of the shortfall, though it may be reduced to 10% if corrected promptly. Spreading withdrawals over multiple years or taking slightly more than the minimum when tax rates are low can help manage tax liabilities while preserving assets.

The order in which accounts are tapped also matters. Withdrawing from taxable brokerage accounts first while allowing tax-advantaged accounts like IRAs to continue growing can maximize long-term wealth. Roth IRAs, which offer tax-free qualified withdrawals, can serve as a financial cushion later in retirement.

IRA Rollover vs. Roth Conversion

Deciding between an IRA rollover and a Roth conversion requires evaluating long-term financial goals, tax implications, and future income expectations.

An IRA rollover typically occurs when transferring funds from an employer-sponsored plan, like a 401(k), into an individual retirement account. This move preserves tax-deferred growth while potentially offering a broader range of investment options and lower fees, depending on the provider. Rollovers can be direct, where funds move seamlessly between accounts, or indirect, which requires redepositing the full amount within 60 days to avoid taxes and penalties.

A Roth conversion shifts funds from a traditional IRA to a Roth IRA, triggering immediate taxation on the converted amount. The advantage is tax-free withdrawals in retirement, making this strategy appealing for those expecting to be in a higher tax bracket later. Converting during a market downturn can reduce the taxable amount, allowing assets to recover within the tax-free Roth environment. Paying the conversion tax from non-retirement funds is generally advisable to avoid depleting savings.

Minimizing Tax Liabilities

Managing tax exposure within an IRA helps preserve retirement savings, especially when account values fluctuate. While contributions to traditional IRAs provide tax-deferred growth, withdrawals are taxed as ordinary income, which can lead to higher tax bills if not strategically planned.

Tax-loss harvesting, a common strategy in taxable accounts, does not apply directly to IRAs. However, investors can optimize their tax situation by carefully timing withdrawals and conversions. Spreading distributions over multiple years prevents large one-time withdrawals from pushing an individual into a higher tax bracket. Additionally, converting portions of a traditional IRA to a Roth IRA during lower-income years can minimize the tax burden.

Qualified charitable distributions (QCDs) offer another tax-efficient option for those over 70½. These allow direct donations from an IRA to a charity without counting as taxable income, helping satisfy RMD requirements while reducing overall tax liability.

Rebalancing Approaches

Market downturns can shift an IRA’s asset allocation away from its intended strategy, making periodic rebalancing necessary. When certain asset classes decline more than others, a portfolio may become overweight in more stable investments like bonds or cash, reducing long-term growth potential. Conversely, during market recoveries, equities may surge, increasing exposure to volatility. Adjusting allocations ensures the portfolio remains aligned with financial goals.

Rebalancing can be done by selling overperforming assets to buy underperforming ones or directing new contributions toward lagging asset classes. A common approach is setting a target allocation—such as 60% stocks and 40% bonds—and rebalancing when allocations drift beyond a predetermined threshold, such as 5%. Some investors prefer an annual or semi-annual schedule, while others rebalance based on market conditions.

Using tax-efficient strategies, such as rebalancing within an IRA rather than a taxable account, prevents capital gains taxes from eroding returns.