A Roth IRA provides for retirement savings with a bit of tax sheltering thrown in. Contributions are not deductible, as in a traditional IRA. However, income earned in the account is not taxable, and neither are withdrawals of original contributions and earnings as long as the account has been open five years. As with any investment, there are certain risks associated with a Roth IRA.
Investment and Inflation Risk
A Roth IRA can hold stocks, bonds, mutual funds, precious metals, exchange-traded funds, cash, certificates of deposit and other financial assets. The account custodian handles the purchase and sale of assets under the account-holder's instructions if the IRA is "self-directed." The assets in an IRA are subject to the same risks they would in an ordinary brokerage account. Stocks or mutual funds can fall in value, for example, and company-issued bonds can default, an event that would stop interest payments and greatly reduce the bonds' market value. Whether a Roth IRA holds stocks, bonds, mutual funds or precious metals, its status as an IRA holding does not affect its level of risk. In addition, poor performing assets, or fixed-income assets with limited returns, may not keep up with the rate of inflation. If the annual rate of inflation reaches 5 percent, for example, and a Roth IRA is gaining only 4 percent a year, the IRA loses its purchasing power, regardless of its tax advantages.
Deposit Insurance and IRAs
The Federal Deposit Insurance Corporation insures certain assets under the management of insured institutions, including banks. Covered assets include cash and "time deposits," such as certificates of deposit or money market accounts, that return a lower rate of interest for the presumed safety of the cash principle you invest. If the bank handling your IRA fails, the FDIC steps in and returns any lost assets up to $250,000 per institution. The National Credit Union Insurance Fund handles the same function at credit unions. In effect, there's no risk of losing up to $250,000 in cash, CDs or money markets in a bank- or credit union-managed Roth IRA.
Brokerages don't cover their clients' assets under the FDIC. Instead, investment assets such as stocks, bonds and mutual funds are protected by the Securities Investor Protection Corporation. If for any reason the brokerage should lose or divert investment assets out of a Roth IRA, the SIPC steps in to make the account holder whole up to $250,000 for cash and $500,000 for all investments for a single investor in a single brokerage. Your investments are safe up to those limits from any mishandling by the brokerage, although market risks still apply to stocks, bonds, funds and other assets. The limit applies separately to any joint accounts an individual may have with a spouse, although Roth IRAs, by definition, can only be held by individuals.
- FDIC: Deposit Insurance FAQ
- SIPC.org: Investors with Multiple Accounts
- IRS. "Income Ranges for Determining IRA Eligibility Change for 2021." Accessed Nov. 1, 2020.
- IRS. "Retirement Topics - IRA Contribution Limits." Accessed Nov. 1, 2020.
- IRS. "Roth IRAs." Accessed Nov. 1, 2020.
- IRS. "Publication 590-B (2019), Distributions From Individual Retirement Arrangements (IRAs)." Accessed Nov. 1, 2020.
- IRS. "Amount of Roth IRA Contributions That You Can Make for 2020." Accessed Nov. 1, 2020.
- Vanguard. "Roth IRA Income Limits: Your Compensation Counts." Accessed Nov. 1, 2020.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.