401k

Fraudsters Recommend Using Borrowed 401(k) Funds to Invest

Jun 22, 2020

The rules in place for taking early withdrawals from your retirement account for a hardship permanently reduce your retirement savings because ordinarily you are not allowed to put the money back into the retirement account after the hardship has passed and you must pay income tax on it. In addition, you must pay a 10 percent penalty if you withdraw funds before reaching the retirement age of 59½. THE CARES ACT Allows You to  Borrow From Your Retirement Account As explained by the Securities and Exchange Commission (“ SEC”), the CARES Act provides significant, temporary relief from these provisions for individuals who experience adverse financial consequences as a result of COVID-19 related events. The CARES Act allows qualified individuals impacted by the coronavirus pandemic to pay back funds withdrawn from a qualified retirement plan over a three-year period, and without having the amount recognized as income for tax purposes. The new law also temporarily waives the 10 percent early withdrawal penalty for coronavirus-related distributions (CRDs) made between January 1 and December 31, 2020.  In addition, the CARES Act exempts CRDs from the 20 percent mandatory withholding that normally applies to certain retirement plan distributions.  The CARES Act also doubles the ordinary retirement plan loan limits for qualified individuals to the lesser of $100,000 or 100 percent of the participant’s vested account balance. You will not owe income tax on the amount borrowed from the 401(k) if you pay it back within five years. In addition, qualified individuals with an outstanding loan from their plan (meaning a loan taken before the CARES Act was enacted) that has a repayment due between March 27 and December 31, 2020, can delay their loan repayments for up to one year. However, interest will continue to accrue on these delayed payments. This CARES Act benefits greatly reduce the costs of accessing funds held in retirement accounts, particularly for short term needs, such as severe economic hardship, when the investor expects to return the funds.   With every new source of cash, however, there are always fraudsters seeking to prey on victims.   Some unscrupulous individuals are using these CARES Act benefits, which are intended for those facing economic hardship from COVID-19, to promote high-risk, high-fee investments and other inappropriate products and strategies using borrowed retirement funds. These include products and strategies that have high fees and costs, are not designed to be temporary and, as a result, are unlikely to provide investors with the intended benefits of the CARES Act, particularly over time.  Ways to Protect Yourself from Fraudulent CARES Act Promotions If you are contacted by a professional who recommends that you withdraw money from your retirement savings to invest in securities—either through their firm or in your own self-directed investment account—be sure to first confirm whether they are licensed to give advice or sell investments.  You can verify the status of investment professionals and find out whether they have a history of customer complaints by using free tools from the SEC and FINRA. Also, always be on the lookout for the red flags of fraud: Unlicensed investment professionals Aggressive sellers who may provide exaggerated or false credentials Offers […]

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