The Double Whammy of Retirement Account Scams

Like many Americans, I don't regularly get caught up reading U.S. Senate reports, but one I read recently is an exception. It was written by the majority staff of the Special Committee on Aging and contained some of the most devious ways retirees have been scammed out of their life savings.

The report tells how victims of these scams face huge tax bills after having their bank or brokerage firm accounts cleaned out. The tax bills can be traced back to the Tax Cuts and Jobs Act (TCJA), a 2017 bill that eliminated fraud victims' ability to deduct losses from their federal income tax.

Scams

Scams come in all shapes and sizes and appear custom-designed to snag as many people as possible. Here are two examples of the scams mentioned in the Senate report.

Larry, a retiree in his 70s

After being contacted by someone impersonating a Social Security Administration (SSA) official, Larry was scammed into withdrawing money from his IRA, 401(k), and savings account to purchase cryptocurrency.

Larry's initial loss was $765,000. However, because he can't deduct the loss from his federal income tax return, he's on the hook for an additional $220,000 in federal taxes, bringing his total loss to nearly $1 million.

Richie, a retiree in his 60s

Like Larry and countless others, Richie was contacted by someone pretending to be someone they weren't. Richie's financial nightmare began after his laptop froze and a pop-up directed him to call a number.

The person on the other end of the line told Richie that he worked for Microsoft and that Richie's Social Security number had been compromised. He said two fraudulent charges had already been made to Richie's bank account.

Richie was then connected to someone who claimed to be a Social Security administrator. This scammer tricked Richie into wiring money from his bank accounts to "keep his assets safe." Over a month, Richie sent 11 wire transfers, totaling more than $567,000. He also faced federal and state tax bills on the stolen money, totaling more than $44,000.

It's ultimately about playing into fears

Scammers employ a multitude of schemes. When one doesn't work, they move on to the next. And it's not just beginning investors or elderly retirees who fall for these scams. People from all walks of life have fallen victim.

The Senate report also tells the story of Sally and Bill, retirees in their 70s, who fell for a scam perpetrated by someone posing as a bank representative. According to Sally, the scammer was very convincing. That ability to be believable while offering a "solution" draws a victim close enough to rob.

Scammers depend on their victim's emotional response to the idea of losing their life savings. That emotion clouds their critical thinking and pushes them into taking steps they would never usually take without further investigation.

How taxes come into play

When a person withdraws funds from a taxable or tax-deferred retirement account, like an IRA or 401(k), taxes must be paid on the withdrawal. The amount due is based on the person's total taxable income for the year. Since the TCJA was implemented in 2017, it doesn't matter why the funds were withdrawn, and there are no protections in place for those who were scammed out of their money.

Further, victims under 59 1/2 on the distribution date may be subject to a 10% penalty on early distribution from their accounts.

Protecting yourself

Here are three practical tips for protecting your hard-earned money.

1. Do not respond to fear tactics

Scammers know that many retirees worry about having enough money to get them through retirement. If someone contacts you saying that one of your accounts has been compromised or offers you an investment opportunity that sounds too good to be true, be skeptical.

If anyone pressures you to "act quickly," be immediately suspicious of their motivation. They don't want you to have time to consider your options critically.

2. Don't acknowledge outreach attempts

Another red flag involves unsolicited phone calls, texts, or emails from someone you don't know. Many of those scammed out of their life savings have received contact from total strangers, eventually allowing those people to weasel their way into their lives.

If you receive a call from a number you don't recognize, don't answer. If you receive a text from an unfamiliar number, report it as junk. And if you receive an email from an unfamiliar person (even if it claims to be from a U.S. government agency), delete it. If there were a problem, the government would not contact you via phone, text, or email, but by mail.

3. Understand how ID spoofing works

Let's say someone calls you, saying they're with your bank. You only answered the call because the caller ID appeared to be from your financial institution.

Unfortunately, scammers can make it look like they're calling from anywhere, using a method known as "ID spoofing." They may be sitting in a basement in Peoria, Illinois pretending to be a bank executive, or in a boiler room pretending to be a brokerage firm's tech support.

If someone says they're from your bank or brokerage, get their name and hang up the phone. Then, using the actual number for your bank or brokerage firm (not one the caller has given you), call and ask to speak with a manager. Explain your situation. Chances are good, they will advise you to ignore any further communication from the caller.

For retirees who've been caught up in a recent scam, owing taxes on the money they've lost is a double whammy. At this point, the best anyone can do is outsmart the scammers by not responding.