Yes, you can lose money in an IRA. An IRA is a tax-advantaged container, not a guarantee: it holds whatever investments you put inside it, and those investments can fall in value, get eroded by fees, or be shrunk by taxes and penalties that are difficult or impossible to reverse. Below are the specific ways balances actually shrink, and the rules that make some of those losses permanent.
Market Declines on the Investments You Hold
The value of your IRA rises and falls with whatever sits inside it. If the account holds stock funds and the market drops 20%, your balance drops roughly 20%. This is the most visible way people lose money in an IRA, and downturns shake loose a lot of investors who sell at the worst possible time.
There is an important distinction between a paper loss and one that is locked in. A stock you bought at $50 that falls to $35 is an unrealized loss while you hold it, and the price can recover. Sell at $35 and you have realized the loss, permanently removing that capital from your retirement savings. Panic-selling during a recession is one of the most common ways an IRA holder turns a temporary decline into a permanent one.
Concentration makes losses worse. Investors riding a handful of positions or a single sector take a bigger hit in a bear market than those with broadly diversified holdings, and recovery tends to take longer.
IRA Losses Give You No Tax Deduction
Here is something that catches many people off guard: unlike a regular brokerage account, losses inside an IRA give you no tax benefit at all. In a taxable account, you can sell a losing investment and use the capital loss to offset gains or reduce ordinary income by up to $3,000 per year. That option does not exist inside an IRA. The losses simply disappear.
A narrow workaround once existed for Roth IRAs closed at a loss, but the Tax Cuts and Jobs Act suspended the deduction it relied on starting in 2018, and later legislation made the elimination permanent. Under current federal tax law, there is no mechanism to write off losses that occur inside an IRA. Every dollar lost inside the account is gone with no offsetting tax benefit, which is why asset selection and diversification matter even more here than in a taxable account.
Fees That Compound Against You
Fees are a quieter form of loss, but over decades they can rival a bad year in the market. There are several layers to watch.
- Expense ratios on mutual funds and ETFs are deducted from fund assets before your returns are calculated. Index funds might charge 0.03% to 0.20%, while actively managed funds commonly run 0.50% to 1.00% or more. You never see this as a line item on your statement.
- Advisory fees for a financial advisor or managed account service usually run 0.5% to 1.5% of assets annually, whether the account gains or loses that year.
- Account maintenance fees from some custodians run roughly $25 to $75 per year, more common with smaller balances or older platforms.
- Transfer and closing fees can cost $50 to several hundred dollars if you move your IRA to another firm.
Self-directed IRAs holding alternative assets like real estate or private placements carry significantly higher custodial fees, often $275 to $500 or more per year, plus per-transaction charges. The math only works if returns on the underlying investment are high enough to cover the overhead.
A 1% annual fee difference sounds trivial. On a $200,000 IRA compounding over 25 years, it can mean $100,000 or more in your final balance. Reviewing your all-in cost once a year is one of the highest-return activities in personal finance.
Taxes and Penalties on Early Withdrawals
Taking money out of a traditional IRA before age 59½ triggers a 10% additional tax on the amount withdrawn, on top of ordinary federal and state income taxes.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions The combined hit is steep enough that an early withdrawal is one of the fastest ways to destroy retirement savings.
Consider a single filer in the 22% federal tax bracket who withdraws $50,000 from a traditional IRA at age 45.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Federal income tax takes $11,000. The 10% early withdrawal penalty takes another $5,000. A state with a 5% income tax rate takes $2,500 more. That is $18,500 gone from a $50,000 withdrawal, leaving $31,500 in hand. Worse, the full $50,000 is no longer compounding for another 20 years.
Traditional IRA distributions are taxed as ordinary income because contributions were made with pre-tax dollars or were tax-deductible when made.3Internal Revenue Service. Traditional IRAs Roth IRAs work differently: you can pull out your original contributions at any time without owing taxes or the 10% penalty, since those contributions were made with after-tax money. Roth earnings, however, are subject to both taxes and the penalty if withdrawn before age 59½ and the account is less than five years old.
The IRS does allow penalty-free early withdrawals in certain situations, including total and permanent disability, qualified higher education expenses, a first-time home purchase up to $10,000, and health insurance premiums while receiving unemployment compensation.1Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Ordinary income tax still applies to traditional IRA distributions in those cases.
Rollover Mistakes
When you move money between IRAs using an indirect rollover, your old custodian sends you a check and you have exactly 60 days to deposit those funds into the new IRA. Miss that deadline and the entire amount is treated as a taxable distribution, potentially triggering both income taxes and the 10% early withdrawal penalty if you are under 59½.4Internal Revenue Service. Retirement Plans FAQs Relating to Waivers of the 60-Day Rollover Requirement
There is also a one-per-year limit. You can only do one IRA-to-IRA indirect rollover in any 12-month period, regardless of how many IRAs you own.5Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions A second indirect rollover within that window is treated as a distribution. Direct trustee-to-trustee transfers have no such limit, which is why most advisors recommend them.
Excess Contribution Penalties
For 2026, you can contribute up to $7,500 to your IRAs, or $8,600 if you are 50 or older.6Internal Revenue Service. Retirement Topics – IRA Contribution Limits Go over that limit and the IRS charges a 6% excise tax on the excess amount for every year it remains in the account.7Office of the Law Revision Counsel. 26 USC 4973 – Tax on Excess Contributions to Certain Tax-Favored Accounts
The 6% is not a one-time charge. It recurs annually until you fix the problem. Contribute $9,500 in a year when your limit is $7,500 and the excess $2,000 gets hit with $120 in excise taxes the first year, another $120 the next year, and so on. The fix is to withdraw the excess plus any earnings it generated by your tax filing deadline, including extensions.6Internal Revenue Service. Retirement Topics – IRA Contribution Limits People who set up automatic contributions from multiple accounts or who contribute without checking the income limits for deductibility are the ones most likely to trip on this rule.
Missed Required Minimum Distributions
Once you reach age 73, the IRS requires you to start pulling money out of your traditional IRA each year through required minimum distributions.8Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Skip a distribution or take less than the required amount, and the IRS imposes a 25% excise tax on the shortfall.9Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
Catch and correct the mistake within two years and the penalty drops to 10%.8Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs That is still painful. On a $20,000 missed distribution, the penalty alone runs $2,000 to $5,000, separate from the income taxes owed on the distribution itself. Missed RMDs are especially common among people with IRAs at multiple custodians who lose track of one account, or who confuse the rules because Roth IRAs do not require distributions during the owner’s lifetime.
Prohibited Transactions Can Blow Up the Whole Account
The IRS has strict rules about what an IRA can hold and who it can transact with. Violating them does not just trigger a fine. It can disqualify the entire account.
If your IRA purchases a collectible, including artwork, rugs, antiques, most coins, gems, stamps, or alcoholic beverages, the purchase is treated as an immediate distribution equal to the cost of the item.10Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts You owe income tax on the full amount, plus the 10% early withdrawal penalty if you are under 59½, even though the money never reached your bank account.
The consequences are worse for prohibited transactions involving disqualified persons. A disqualified person includes the IRA owner, their spouse, ancestors, lineal descendants, and spouses of lineal descendants.11Internal Revenue Service. Retirement Topics – Prohibited Transactions Using a self-directed IRA to buy a rental property and then letting your daughter live in it, or personally performing repairs on a property owned by your IRA, would qualify.
When an IRA owner engages in a prohibited transaction, the entire account ceases to be an IRA as of the first day of that tax year.10Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts The full balance is treated as a distribution, meaning income tax on everything, plus the 10% penalty on the whole balance if applicable. On a $300,000 self-directed IRA, that single mistake could cost $100,000 or more. It happens more often than you would expect with self-directed accounts holding real estate or private investments.
Inflation Erosion in Cash-Heavy IRAs
Not every loss shows up as a declining balance. If your IRA sits mostly in cash or a money market fund earning 1% while inflation runs at 3%, the account is losing 2% of its purchasing power each year. The dollar figure grows slightly. What those dollars can buy shrinks.
Over a 20-year period, 2% annual real erosion cuts purchasing power by roughly a third. An IRA holding $200,000 in cash would still show $200,000 on the statement plus modest interest, but in terms of what it could buy at the start, it is worth closer to $130,000. Healthcare costs, which tend to rise faster than general inflation, make this especially acute for retirees. Conservative investors who keep large cash positions are effectively choosing a guaranteed small loss over the chance of a larger but temporary one.
What FDIC and SIPC Do Not Cover
If your IRA is at a bank, FDIC insurance covers up to $250,000 per depositor in the retirement account ownership category, separate from the $250,000 limit on regular checking and savings at the same bank.12FDIC.gov. Understanding Deposit Insurance At a brokerage firm, SIPC protects up to $500,000 in securities, including a $250,000 limit for cash, but only if the brokerage firm itself fails.13SIPC. What SIPC Protects
Neither program protects against investment losses. FDIC covers bank failure. SIPC covers brokerage firm failure. If your stock drops 40%, that is your loss regardless of where the account is held. For large IRAs, spreading assets across multiple institutions is the straightforward way to stay within coverage limits for the risks these programs actually address.