Many financial experts spent the better part of 2022 warning consumers to gear up for a 2023 recession. Only that never happened. And while we're not quite done with 2023, at this point, it's pretty fair to say that the economy is in a good position to hold steady until 2024.
But just because we managed to avoid a 2023 recession doesn't mean we're permanently in the clear. There's a good chance all of us will experience a recession at some point in time. And if you have money sitting in an individual retirement account (IRA), you should know that a recession may or may not have an impact on it.
What's a recession, anyway?
Technically, a recession is defined as two or more consecutive quarters of decline in gross domestic product. But when the media talks of a recession, it generally refers to a period of general economic decline. Higher levels of unemployment, for example, could be called a recession, as could a drop in consumer spending.
But one thing that's worth noting is that a recession is not defined as a decline in stock market values. A recession could cause stock values to drop, but that's not guaranteed to happen.
Another recession is likely
Over the past 40 years or so, the U.S. economy has experienced a number of notable recessions. In the early 80s, rampant inflation and interest rate hikes drove the broad economy into a slump. In the early 1990s, rising oil prices fueled a downturn.
In the early 2000s, the dot-com bubble burst. That, coupled with the events of Sept. 11, drove the economy into a recession. And anyone who was of working age or older in 2007 surely remembers the Great Recession -- a multi-year affair triggered by the collapse of the housing market that led to widespread job loss.
Interestingly enough, our last recession -- the one that took place in early 2020 following the COVID-19 outbreak -- was fairly short-lived. And its impact on the stock market was quite temporary. Stock values briefly declined during the first half of the year before staging a marvelous recovery before 2020 closed out.
The point of all of this is that we're likely to have another recession. And it may or may not impact your retirement savings. Recessions don't always drive stock values down, but they could. So it's important to know what to do in that situation.
Safeguarding your IRA in recession
If a recession hits and causes your IRA to lose value, the best thing to do is actually nothing. See, you don't lock in investment losses in your IRA unless you actively sell off investments when their value is down. If you leave your IRA alone after it loses value, you give it a chance to recover.
In March of 2009, the S&P 500 index (which is generally considered representative of the stock market on a whole) had a value of about 683. Compared to 1,288 a year prior, that read like a huge hit. But as of this writing, the index's value is roughly 4,240.
People who sold off investments at a loss in 2009 may have never recovered. Those who left their portfolios alone may be sitting pretty right now.
All told, it's hard to predict exactly what will happen to your IRA in a recession. But if you pledge to leave your savings alone, you can set yourself up to recover nicely.
It's also important to load your emergency fund with cash you can tap in the event of losing your job -- something that may be more likely to happen during a recession. If you have money in a regular savings account for that purpose, you'll be less likely to need to tap your IRA in a pinch.
FAQs
If a recession hits and causes your IRA to lose value, the best thing to do is actually nothing. See, you don't lock in investment losses in your IRA unless you actively sell off investments when their value is down. If you leave your IRA alone after it loses value, you give it a chance to recover.
Is an IRA safe during a recession? ›
Especially in a recession, a broad portfolio can help to reduce the magnitude of changes in your IRA's value, which can lead to more sustained growth of your capital. However you decide to allocate funds within your IRA, depending on your situation, you may want to get professional advice.
Where is the safest place to put your money during a recession? ›
Treasurys, says Collins, are similar to government and corporate bonds, as they are backed by the full faith and credit of the U.S. government. They are typically seen as safe investments during a recession. "In times of market volatility, investors may flock toward Treasury bonds, seeking stability," he says.
What happens to an IRA if the stock market crashes? ›
Market Fluctuations
That means that if the market experiences a downturn or correction, your Roth IRA balance is likely to decline as well. That's not a certainty, however, as IRAs are generally invested in a range of assets, not all of which may be affected by larger market conditions.
How can I protect my IRA from market crash? ›
Diversification Helps
Having a portfolio with bond funds can counterbalance market volatility. At the same time, a sufficient amount of stock funds and investments in real estate and commodities can help preserve the principal and counterbalance inflation.
Is it possible to lose money in an IRA? ›
Despite the advantages, you can lose some or all of the money you put into a Roth IRA. One possible reason for a decline in the value of a Roth IRA is market volatility. Other losses can be attributed to early withdrawal penalties and investment fees.
Will my IRA ever recover? ›
And if you're many years away from retirement, it means you have plenty of time to recover from the events of 2022 and still wind up with a sizable nest egg. In fact, let's say you just turned 35 and your goal is to work until your mid-60s. That means your IRA has a good 30 years to recover.
Should I leave my money in the bank during a recession? ›
Banking regulation has changed over the last 100 years to provide more protection to consumers. You can keep money in a bank account during a recession and it will be safe through FDIC and NCUA deposit insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.
Is it better to have cash or property in a recession? ›
Cash. Cash is an important asset during a recession. Having an emergency fund to tap if you need extra cash is helpful. This way, you can let your investments ride out market lows and capitalize on long-term growth.
Can banks seize your money if the economy fails? ›
The short answer is no. Banks cannot take your money without your permission, at least not legally. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder, per bank. If the bank fails, you will return your money to the insured limit.
All investing is subject to risk, including the possible loss of the money you invest. When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
Can you take a loss on stock in an IRA? ›
The Internal Revenue Service does not permit you to deduct losses from your Roth IRA on a year-to-year basis, so the only way to deduct your losses is to close your Roth IRA accounts.
What happens to IRA if brokerage fails? ›
Typically, when a brokerage firm fails, the Securities Investor Protection Corporation (SIPC) arranges the transfer of the failed brokerage's accounts to a different securities brokerage firm. If the SIPC is unable to arrange the accounts' transfer, the failed firm is liquidated.
How does a recession affect a retired person? ›
Besides generally disrupting your retirement plan, you may see a decrease in the value of your retirement savings and investments, living expenses and taxes. Safeguarding your assets and maintaining a long-term perspective can help protect your retirement savings during a recession.
Is an IRA safer than a 401k? ›
IRA money held by a brokerage or investment firm is usually invested in securities such as mutual funds or stocks, which fluctuate in value. Note that an IRA is no more or less likely to decline in value than any other investment account. The owner of an IRA faces the same market risks as a 401(k).
Why is my IRA doing so bad? ›
You can expect your IRA balance to fluctuate up and down between now and retirement due to interest rate changes, inflation, politics and other factors. What matters most is staying invested in a way that supports your long-term goals and risk tolerance, such as through diversification.
What is the safest investment in a recession? ›
Healthy large cap stocks also tend to hold up relatively well during downturns. Investing in broad funds can help reduce recession risk through diversification. Bonds and dividend stocks can provide income to cushion investors against downturns.
What is the best asset to hold during a recession? ›
Cash. Cash is an important asset during a recession. Having an emergency fund to tap if you need extra cash is helpful. This way, you can let your investments ride out market lows and capitalize on long-term growth.
What not to invest in during a recession? ›
Avoiding highly indebted companies, high-yield bonds and speculative investments will be important during a recession to ensure your portfolio is not exposed to unnecessary risk. Instead, it's better to focus on high-quality government securities, investment-grade bonds and companies with sound balance sheets.
