The dual impact of fraudulent schemes targeting retirement accounts.

Similar to most Americans, I don’t typically spend time reading U.S. Senate reports. However, one report that caught my attention was authored by the majority team of the Special Committee on Aging. This report highlighted some of the cunning methods through which elderly individuals have fallen victim to scams, resulting in the loss of their retirement funds.

The report explains how individuals who fall victim to these scams end up with substantial tax liabilities following their bank or financial information being compromised. brokerage firm accounts refer to the accounts that clients open with brokerage firms to buy and sell financial assets such as stocks, bonds, and commodities. The tax bills can be attributed to the Tax Cuts and Jobs Act (TCJA) of 2017, which removed the option for fraud victims to deduct their losses from their federal income tax.

Scams

Frauds can vary greatly in form and scope, seemingly tailored to deceive as many individuals as they can. Below are two illustrations of the fraudulent schemes discussed. Senate report .

Larry is a man in his seventies who is retired.

Larry fell victim to a scam when he was approached by an individual pretending to be an official from the Social Security Administration (SSA). As a result, he was deceived into taking out funds from his IRA, 401(k), and savings account to buy cryptocurrency.

Larry experienced an initial loss of $765,000. Due to the fact that he is unable to offset this loss on his federal tax return, he is now required to pay an extra $220,000 in federal taxes, resulting in a total loss of almost $1 million.

Richie, a man who is in his 60s and has retired

Similar to Larry and many others, Richie fell victim to a scam where he was contacted by an imposter. Richie’s financial troubles started when his laptop stopped working and a pop-up message instructed him to dial a specific phone number.

Richie was informed by the individual on the phone that they were an employee of Microsoft and that Richie’s Social Security number had been exposed. They mentioned that two unauthorized transactions had already been carried out on Richie’s bank account.

Richie was later in touch with an individual who pretended to be an official from the Social Security administration. This fraudulent person deceived Richie into transferring funds from his bank accounts to “protect his assets.” Within a month, Richie made 11 wire transactions, amounting to over $567,000. Additionally, he had to pay federal and state taxes on the embezzled money, which added up to more than $44,000.

It ultimately revolves around exploiting fears.

Fraudsters use various tactics and strategies. If one method fails, they simply proceed to the next one. novice investors Even seniors who are retired are susceptible to these scams. Individuals from all backgrounds have been targeted and deceived.

The Senate report includes the account of Sally and Bill, a couple in their seventies, who were deceived by a fraud carried out by an individual pretending to be a bank employee. Sally described the scammer as highly persuasive. This skill in appearing trustworthy and providing a supposed “answer” lures victims into a situation where they can be exploited.

Scammers rely on their victim’s emotional reaction to the thought of losing all their savings. This feeling hinders their ability to think rationally and leads them to make decisions they wouldn’t normally make without conducting more research.

The role of taxes

When an individual takes out money from a retirement account that is subject to taxation either immediately or at a later time, such as a taxable or tax-deferred account. an IRA Taxes need to be paid on withdrawals from a 401(k) account, and the tax amount is determined by the individual’s total taxable income for the year. Following the enactment of the TCJA in 2017, the reason for the withdrawal no longer affects the tax liability, and individuals who have been victims of scams do not have any specific protections in this regard.

Additionally, individuals who are younger than 59 1/2 at the time of distribution may face a 10% penalty for withdrawing funds from their accounts early.

Ensuring your safety

Listed below are three useful suggestions for safeguarding your earned income.

Avoid reacting to scaremongering techniques.

Scammers are aware that a lot of retirees are concerned about having sufficient funds to support them during their retirement years. If you receive a message claiming that your account has been compromised or if you are presented with an investment opportunity that seems overly lucrative, it is important to approach the situation with caution.

If someone urges you to make a decision rapidly, it is important to question their intentions. They may not want you to have the opportunity to carefully evaluate your choices.

Ignore outreach efforts.

Another warning sign is receiving unexpected phone calls, messages, or emails from unfamiliar individuals. A significant number of individuals who have been deceived into losing their savings were initially contacted by strangers, who eventually managed to gain their trust and become involved in their lives.

If you get a call from a number you don’t know, it’s best not to pick up. If you receive a text from a number you’re not familiar with, mark it as spam. And if you receive an email from someone you don’t recognize (even if they say they’re from a U.S. government office), it’s safer to delete it. In case of any issue, the government would communicate with you through regular mail and not through phone calls, texts, or emails.

Gain an understanding of the functioning of ID spoofing.

Imagine you receive a phone call from an individual claiming to be from your bank. The reason you picked up the call is that the caller ID showed the name of your financial institution.

Regrettably, scammers have the ability to manipulate their caller ID to make it seem like they are calling from a different location. This deceptive technique, known as “ID spoofing,” allows them to appear as if they are someone else, such as a bank executive in Peoria, Illinois or a tech support representative for a brokerage firm in a boiler room.

In case someone claims to be from your bank or brokerage, ask for their name and end the call. After that, use the official contact number for your bank or brokerage (not the one provided by the caller) to call and request to talk to a manager. Describe the situation to them. It is likely that they will recommend you to disregard any future contact from the caller.

Retirees who have fallen victim to a recent scam face the additional burden of having to pay taxes on the funds they have lost, which compounds their troubles. The most effective course of action now is to outwit the scammers by refraining from engaging with them.