What Happens If an IRA Loses All Its Money?
Investors can buy a variety of different investment products with proceeds from Individual Retirement Accounts. Some IRA investments have principal guarantees that prevent account holders from losing their whole investment, but some accounts have no guarantees and customers can lose their entire investment in down markets. Many people rely heavily on IRA funds to meet their income needs during retirement and people who lose all of their IRA funds often have to delay retirement or work for life.
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Investment Losses
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Securities such as stocks, bonds and mutual funds are priced daily and have no principal guarantees. If a company goes bankrupt, any stock in it becomes worthless, while bonds are worthless if the entity that issued the bonds defaults on payments, goes bankrupt and has no assets to settle the debt. Mutual funds contain stocks and bonds that could become worthless if the underlying assets lose value. Someone holding these investments inside an IRA has no recourse if the instruments lose value.
Principal Guarantees
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IRAs invested in certificates of deposits issued by banks are protected up to $250,000 per account holder per bank. If a bank goes bankrupt, the customer has no assurances of receiving payment on funds in excess of the $250,000 limit. State insurance guaranty funds insure fixed and variable annuities, including IRA annuities up to $100,000 in the event that the insurer holding the contract goes bankrupt. Some state, such as Arkansas, have higher limits and insure annuities up to $300,000.
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Securities Investor Protection Corporation
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An investor whose IRA loses all of its money because the brokerage firm holding it goes bankrupt can get up to $500,000 of the lost money back if the brokerage in question belonged to the Securities Investor Protection Corporation. The SIPC insures many types of investments although fixed annuities are uninsured. Within the coverage limit of $500,000, the SIPC covers up to $250,000 of cash held inside brokerage accounts at bankrupt member firms.
Risks
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Investors with IRAs have to contend with a variety of risks including loss of principal. Conservative investors often opt to invest heavily in FDIC insured CDs because the products have principal guarantees. Historically, CD rates are low and barely match inflation, so over the long-term, CD IRA investors lose spending power. Aggressive investors who buy mutual fund have the chance for greater rewards but also run the risk that the IRA could lose its entire value. To counter all of the risks, most investment advisers recommend that IRA account holders diversify their holdings between different types of investments.
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References
- Federal Deposit Insurance Corporation: Deposit Insurance FAQs
- National Organization of Life and Health Insurance Guaranty Associations: What is NOHLGA?
- Bankrate: Deducting IRA Losses
- CNBC: Recouping Losses in Your IRA
- Securities Investor Protection Corporation: Answers to the Seven Most Asked Questions
