How To Protect Your Roth IRA From a Stock Market Crash
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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A stock market crash can be a nightmare for any investor, but if you have a Roth IRA, the stakes might feel even higher. Unlike traditional retirement accounts such as a 401(k), where taxes are deferred, your Roth IRA is built on after-tax contributions, meaning every dollar lost in a downturn is a dollar you can’t deduct later.
While you can’t control the market, you can take steps to safeguard your retirement savings from volatility. Experts offered some tips on how to protect your Roth IRA from a market crash.
Some Volatility Is Unavoidable
John Jones, an investment advisor representative at Heritage Financial, said that there’s no way to completely proof your Roth IRA against a crash. “With this market exposure there is always the probability of volatility and corrections. In my opinion, it is not a matter of if, but when.”
Jones said he’s not fond of the term “safe” when it comes to investments, “because the risks in any component can be identified, as stable as the investment may seem.”
Instead, it’s important to have “a holistic plan that properly plans and anticipates if market corrections do or do not occur is prudent, allowing assets to participate in wealth accumulation while also not being eroded by inflation.”
However, he said if a Roth IRA is included in one’s portfolio, these tax-free accounts should be invested more aggressively in the “later” buckets of one’s financial plan.
“Due to the tax-free nature, we want them to have as much potential to grow tax-free as possible.”
Diversify Your Investments
One way to reduce the impact of a stock market crash is to spread your money across various asset classes (e.g., stocks, bonds, real estate and commodities), according to Christopher Stroup, CFP and owner of Silicon Beach Financial.
“You could allocate a portion of your Roth IRA to low-risk investments like bonds, dividend-paying stocks, or even precious metals, which tend to perform well during market downturns,” Stroup said.
Increase Cash Allocations
Another strategy is to keep a portion of your Roth IRA in cash or cash-equivalents (like money market funds), which can provide stability, Stroup said.
“When the market crashes, cash preserves its value and allows you to buy back into the market at lower prices.”
Consider Defensive Stocks or ETFs
While no stock is fully immune to a downturn or crash, stocks in sectors like utilities, healthcare and consumer staples tend to be less volatile during economic downturns, Stroup said.
“You can invest in ETFs or mutual funds that focus on these stable sectors, giving you a defensive shield against volatility,” he added.
Invest In Dividend-Paying Stocks
Stocks that pay dividends tend to be more resilient during market crashes because they generate steady income, even if their stock prices drop, Stroup said. This is often because dividend-paying companies are established and financially sound, making them less likely to experience significant losses.
Rebalance Regularly
Regularly reviewing and adjusting your asset allocation based on your risk tolerance can help you stay on track during volatile market conditions. Rebalancing involves shifting funds from over-performing sectors or asset classes to underperforming ones. This keeps your portfolio aligned with your long-term goals and risk tolerance.
A Market Crash Isn’t Always Bad for Roth IRAs
Jones has a somewhat controversial stance: “I am actually of the opinion that a market crash is healthy for Roth IRAs, in that market timing Roth conversions can be performed at a market discount and allow possible greater future appreciation potential.”
Of course, this is only true if you have time to make up for any losses and aren’t very near or in retirement.
Stabilize Volatility Through Planning
With a Roth IRA being a flexible investment account, one can stabilize their portfolio through annuities, tactical funds, CDs, buffered funds, cash, money markets and many more investment vehicles, Jones said.
“However, ensuring the risk for each account ultimately aligns with the individual’s plan is key. It is important to not focus so much on products as it is to have a holistic plan.”
Additionally, stability often has downsides, too, Jones pointed out. “If the Roth IRA is stable, so as to not be subject to traditional market volatility, the account may not be functioning properly for the individual because there is the chance that the Roth is not generating the higher tax-free returns possible.”
No matter how you try to set yourself up for maximum protection, consult with a financial planner for the best results.
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