Non-Traditional Investment Scams | Ed Slott and Company, LLC

Non-Traditional Investment Scams

By Beverly DeVeny, IRA Technical Expert
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@BevIRAEdSlott

I just read a private letter ruling (PLR) issued by IRS allowing an individual extra time to complete a rollover of his IRA assets so that they would not be treated as a taxable distribution. Here is what happened.

The account owner was advised – by his financial advisor – to cash out his IRA in order to invest in trust deeds. “Time was of the essence” so the account owner signed a blank withdrawal form which the advisor would then complete. The account owner was instructed to set up a new IRA to hold the trust deeds. The funds from the old IRA were sent to the account owner’s checking account and he subsequently wired them to an LLC to purchase the trust deeds.

After hearing nothing for several weeks, the account owner started asking the advisor where the trust deeds were. Eventually he was told that the LLC erred and that the purchase of the trust deeds with funds from the checking account could leave him liable for income taxes on the distribution.

In the third month after the distribution, the account owner learned that his funds had never been used to purchase trust deeds. He then began attempting to get his money back from his financial advisor. With the help of another advisor, from the same firm, the account owner was eventually successful in recovering his funds.

What can you learn from this?
Beware of a sure thing.
Beware of transactions that must be completed in a hurry.
IRA investments must be purchased by an IRA.

This transaction cost the account owner lost gains on the account, time and effort to recover his funds, the IRS filing fee for the PLR, which was most likely $3,000 (it is on a sliding scale), and a fee for preparing the PLR request.

Don’t let this happen to you. Take the time to do some research or ask for a second opinion. It could make the difference between having a comfortable retirement or not being able to fully retire.
 

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