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Question Headline:

What are the risks associated with a Roth IRA?

Question Body:

Your Answer:

There are 3 primary risks associated with an IRA.

1. Poor Investment Choice Risk

• Presumably funds within a Roth IRA are being invested in market traded securities such as stocks, bonds, mutual funds, REITs, and ETFs. Investing in market traded securities always includes the risk of loss of principle. Investing funds within a Roth IRA or another account requires the investor to have the right mix of securities based on their goals, time horizon, and cash flow needs from the portfolio.

2. Changes in Investor Circumstances

• Funds invested within a Roth IRA grow tax-free and distributions in retirement (after age 59 ½) are also tax-free. These great features come with restrictions, specifically the accounts are meant for retirement savings. An investor that has a change in circumstances that needs to access their funds prior to retirement (age 59 ½) may face penalties and taxes.

3. Opportunity Cost Risks

• With any investment, there is always the risk of “missing out” on some other better investment, this is called opportunity cost risk. Investor capital that is allocated in a Roth IRA cannot be put towards other investment vehicles which ultimately might have proven more beneficial.

 

– Wyatt Swartz

– 9/25/17