First Person: Investing After a Roth IRA Wipeout

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I have been reluctant to invest in the stock market after my Roth IRA was wiped out. Part of the problem was that I did a poor job selecting stocks. The other reason for my Roth IRA wipeout was the fact that I used the account as an emergency fund, especially during the Great Recession. After a decade, I have taken out almost as much as I contributed. According to a recent Chicago Tribune article, the Roth IRA can be a back-up emergency fund. Some experts say the Roth can essentially kill two birds with one stone by allowing a person to save for retirement and save for emergencies. However, my plan had been to use my contributions as my emergency fund and the gains on those contributions as my retirement fund. After 10 years, my account was simply wiped out due to individual stocks that went bankrupt and due to my countless financial "emergencies." I could give up totally on the Roth IRA, but plan to start investing again the right way. At age 40, I still have time to make the most of a Roth IRA.

Keeping the account going

I though about whether I should simply close down my Roth IRA accounts. If I sold some individual stocks, I could lock in some losses. If I wanted to claim a loss, I'd have to close down all of my Roth IRA accounts. Also, I'd have to choose to itemize my deductions instead of taking the standard deduction. Since my losses would be fairly small, I would personally do better to stick with my standard deduction.

Avoiding individual stocks

My first priority is to diversify in my Roth IRA account in the future. I do not plan to sell any of the individual stocks I already own, but I won't purchase more. Instead, I have chosen a few dividend-paying exchange-traded funds (ETFS) that don't charge a commission fee. I can purchase just 10 shares of the ETFS at a time because there is no fee to buy the shares as long as I keep them for at least 30 days. I plan to purchase a small number of shares every two weeks.

Keeping a cash reserve

Another mistake I made with my Roth was buying stocks with all of my money instead of keeping some of my money within the Roth account in a money market account or cash position. If I have a financial emergency such as an unexpected medical bill, I need to be able to take out the money I put in without worrying about selling a stock that is down in value. In the long run, it will protect my Roth IRA account from needless losses.

Saving money in savings

One of the most important things I need to do is change the habit of saving in my Roth IRA instead of saving in a regular savings account. I plan to save $100 in my regular cash emergency account for every $25 I save in my Roth IRA. I plan to build up $10,000 in my Roth before I start investing in stocks and bonds. My goal is to max out my Roth IRA account for two years before I invest again after my Roth IRA wipeout.

Essentially, I gambled with my retirement by picking speculative stocks instead of more conservative mutual funds and ETFS. I also turned to my Roth IRA when I should have turned to a regular savings account. I am just glad I have another 27 years to build up my retirement account again. The reward will come when I can take out the money when I'm retired without owing any taxes.

More from this contributor:

I'm Not Retiring to a College Town

Preventing a Bag Lady Future

Saving for Retirement in my 20s Backfired

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