With the economy roiling, many investors have lost or are losing money on their IRAs. It can be depressing to open your quarterly statement to see that your retirement money is steadily shrinking. The good news is that you don't have to simply watch your dollars dwindle. You can take steps to at least stop the damage before it gets worse.
Wait it Out or Act
You'll have to determine whether it makes more sense to wait out the bad economy and hope that your individual retirement account eventually recovers, or whether it's wiser to act now to try to improve your IRA's performance. Your age is a crucial factor in making this decision.
If you're far from retirement age, it's probably best to wait out the bad economy. The economy moves in cycles. If you have more than 10 years before retirement, you can usually outlast any negative cycle. If you leave your IRA alone, chances are you'll eventually see the losses turn into gains as the economy improves. In fact, as 2009 moved along, many investors saw their IRAs begin to shoot up in value again as the stock market regained some of its health. If you took action during the weakest days of the economy and shifted your IRA money out of stocks and into safer investments like bonds, you might have lost out on the big jumps in value that more-patient IRA holders experienced.
If you are close to retirement age, though, and you see your IRA dollars falling, you might want to move them into safer investments. No one can predict the fortunes of the stock market from one week to the next. If you're five years or fewer away from retirement, it might make sense to move your funds into steadier investments such as bonds. Your money won't grow as fast if the stock market suddenly booms, but it won't fall as quickly if the market falters.
Lessen the pain
There is a tax strategy that can help lessen the pain from an IRA that lost value during a year.
Say you made a contribution to your IRA during 2009, but when the year ends, you see that the value of your account has dropped. In such a case, you can withdraw your contribution plus any earnings from your IRA up to the due date of your income tax return. After you take out this amount, you are free to once again contribute the maximum amount allowable to your IRA for 2009.
Sure, this won't erase any losses your IRA suffered during the year. But it does let you add additional money to your IRA account, with the chance for better-performing investments this time around.
Do a recharacterization
You might have rolled your traditional IRA into a Roth IRA during the year to take advantage of the tax benefits that come with such a move. But what if you moved $8,000 into your new Roth, and you're left with just $6,000 when the year ends?
You can take advantage of a tax tool known as recharacterization to at least ease the sting of paying taxes on an IRA conversion that eventually lost money.
By recharacterizing the Roth, you put the money back into a traditional IRA. If you do this, you won't have to pay taxes on the initial conversion.
This process is far from simple. It's best to work with a tax preparer or certified public accountant to handle a recharacterization properly.