Can Your Roth IRA Lose Money? Market Drops, Fees, and Penalties

Yes, a Roth IRA can lose money. The balance rises and falls with whatever you invest in, fees chip away at it whether markets are up or down, inflation erodes what those dollars will actually buy, and a handful of tax rules can turn what looks like a gain into a real loss if you break them. The tax-free growth that makes the account attractive depends on choosing reasonable investments, staying within the contribution rules, and leaving the money alone long enough to ride out the risks below.

Market Declines

A Roth IRA is a container. Whatever sits inside it — stocks, bonds, mutual funds, ETFs — determines what happens to your balance. When the broader market drops 20% or more from recent highs, that is generally called a bear market, and your account reflects the loss in real time.¹ A $10,000 position in a total market index fund could temporarily be worth $8,000 or less during a steep downturn.

Bonds have their own risk. When interest rates rise, the market price of existing bonds usually falls because newer bonds pay higher yields. Long-term government and corporate bonds can lose market value even when the issuer never misses a payment, and selling before maturity locks in that loss.

Diversified mutual funds and ETFs spread risk across many companies, but they are not immune to a broad selloff. If the fund’s underlying holdings fall, the share price falls, and your Roth IRA falls with it. Diversification softens the blow of any single company failing. It does not remove the possibility of loss during a widespread decline.

Fees

Even in a flat market, fees quietly shrink the account. There are a few kinds worth knowing.

Custodial and Account Fees

Some firms charge an annual custodial or maintenance fee simply for holding the account. Amounts vary widely — some charge nothing, others a flat annual amount, typically deducted from cash or by selling a sliver of holdings. Over decades, even modest recurring charges reduce the money working for you.

Expense Ratios

Mutual funds and ETFs charge an expense ratio, a percentage of your invested balance that covers the fund’s operating costs. Low-cost index funds may charge 0.03% to 0.10% a year. Actively managed funds can charge 1% or more. A 1% expense ratio costs $100 a year on every $10,000 invested, whether the fund gained or lost that year. Choosing lower-cost funds is one of the most reliable ways to keep more of your returns.

Transfer and Closure Fees

Moving your Roth IRA to a different brokerage often triggers an outgoing transfer fee, commonly $50 to $100. Some providers also charge a termination fee when you close an account. These are one-time costs, but they come straight out of your balance.

Inflation

Your statement shows a dollar figure. It does not show what those dollars will actually buy. If your balance sits flat at $50,000 while prices rise 3% a year, that money buys less each year even though the number on the screen never changes.

A portfolio growing at 2% while inflation runs at 4% is effectively losing 2% of its purchasing power a year, and over decades the gap compounds. The real measure of retirement savings is what the dollars will buy when you need them, not how many of them there are. Investments that at least keep pace with inflation, such as stocks over long holding periods, help protect against this quieter loss.

Taxes and Penalties on Early Withdrawals

A qualified Roth IRA withdrawal is tax-free. Pulling money out too early, or under the wrong circumstances, can trigger income tax and a 10% penalty that permanently reduce the account.

Contributions Come Out First

Roth IRA distributions follow a set order under federal law: your direct contributions first, then any converted amounts, and finally your earnings.² Because you already paid tax on your contributions, you can withdraw them at any time, at any age, for any reason, with no tax and no penalty.³

The penalties below apply to earnings, and in some cases to converted amounts withdrawn within five years. If you have contributed $30,000 and the account is worth $40,000, the first $30,000 you withdraw is penalty-free at any age. Only the $10,000 in earnings is at risk if the withdrawal is not qualified.

The 10% Penalty on Earnings

Withdraw earnings before age 59½ and, if the distribution is not qualified, those earnings owe an additional 10% tax.⁴ The same earnings are also taxed as ordinary income at your current federal rate. Withdraw $5,000 in earnings while in the 22% bracket, and you owe $1,100 in income tax plus a $500 penalty, losing $1,600 of the $5,000.

The Five-Year Rules

Turning 59½ is not enough on its own. Your first contribution to any Roth IRA must have been made at least five tax years before the withdrawal for earnings to come out tax-free.⁵ The clock starts January 1 of the tax year for which you made that first contribution. First contribution for tax year 2024? The five-year period ends January 1, 2029.

Conversions have their own separate five-year clock, and each conversion carries its own. Withdrawing a converted amount within its window can trigger the 10% penalty on any portion that was taxable at the time of the conversion.⁵

Exceptions to the 10% Penalty

Several situations let you take earnings out before 59½ without the 10% penalty, though income tax on the earnings can still apply if the five-year rule is not met. The most common:⁶

First-time home purchase, up to $10,000 lifetime toward buying, building, or rebuilding a first home.
Total and permanent disability of the account owner.
Qualified higher education expenses.
Unreimbursed medical expenses above 7.5% of adjusted gross income.
Health insurance premiums after at least 12 weeks of unemployment compensation.
Birth or adoption expenses, up to $5,000 per child.
Substantially equal periodic payments taken over your life expectancy.
Economic losses from a federally declared disaster, up to $22,000.
Amounts seized by the IRS to satisfy a tax debt.

Each exception has its own eligibility rules. The first-time homebuyer exception, for instance, counts anyone who has not owned a home in the previous two years, and the $10,000 limit applies across all your IRAs over your lifetime.⁶

Excess Contribution Penalty

Contribute more than the legal limit and the excess is hit with a 6% excise tax for every year it stays in the account.⁷ For 2026, the annual limit is $7,500, or $8,600 if you are 50 or older, and it applies to all your traditional and Roth IRAs combined, not per account.⁸

Income limits also matter. For 2026, single filers can make a full contribution with a modified adjusted gross income below $153,000, phasing out completely at $168,000. Married couples filing jointly phase out between $242,000 and $252,000.⁹ Contribute above the threshold anyway and the 6% penalty applies each year until the excess is removed. Pull the excess and any earnings it generated by the tax-filing deadline for that year and you avoid the recurring tax.

Prohibited Transactions

Certain dealings between you and your Roth IRA are classified as prohibited transactions and can carry severe consequences, up to and including complete disqualification of the account. Examples include:¹⁰

Borrowing money from the IRA.
Selling property you personally own to the IRA.
Using IRA assets as collateral for a personal loan.
Buying property for personal use with IRA funds.

A person involved in a prohibited transaction owes an initial excise tax of 15% of the amount involved for each year or partial year the violation goes uncorrected. If it is not reversed within the IRS-defined correction period, an additional tax of 100% of the amount involved applies.¹¹

Worse, if the IRS determines you or a beneficiary engaged in a prohibited transaction at any point during the year, the entire account can lose its tax-advantaged status as of January 1 of that year.¹⁰ The full balance is then treated as a distribution, so you owe income tax on all the earnings, plus the 10% early withdrawal penalty if you are under 59½. A single prohibited transaction can erase years of tax-free growth.

Losses in a Roth IRA Are Not Tax-Deductible

Losses inside a Roth IRA cannot be used to offset gains or reduce your taxable income. You cannot claim a capital loss deduction for stocks or funds that dropped in value while held in the account. Before 2018, there was a narrow exception: if you closed all your Roth IRAs and total distributions were less than total contributions, the shortfall could be claimed as a miscellaneous itemized deduction. That deduction was suspended by the Tax Cuts and Jobs Act and is no longer available. The inability to harvest tax losses is a trade-off against the account’s tax-free growth.

If the Brokerage Fails

If the firm holding your Roth IRA goes out of business, you do not automatically lose the investments. The Securities Investor Protection Corporation covers customers of failed member firms up to $500,000 for securities and cash combined, with a $250,000 sublimit for cash. A Roth IRA is treated as a separate capacity from other accounts at the same firm.¹² SIPC does not cover market losses. It applies only when the brokerage itself fails and customer assets are missing.

1
U.S. Securities and Exchange Commission. Bear Market
2
Office of the Law Revision Counsel. 26 U.S. Code 408A – Roth IRAs
3
Internal Revenue Service. Publication 590-B – Distributions from Individual Retirement Arrangements
4
Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
5
Office of the Law Revision Counsel. 26 U.S. Code 408A – Roth IRAs
6
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
7
Office of the Law Revision Counsel. 26 U.S. Code 4973 – Tax on Excess Contributions to Certain Tax-Favored Accounts and Annuities
8
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
9
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026; IRA Limit Increases to $7,500
10
Internal Revenue Service. Retirement Topics – Prohibited Transactions
11
Office of the Law Revision Counsel. 26 U.S. Code 4975 – Tax on Prohibited Transactions
12
SIPC. Investors with Multiple Accounts