5 Reasons Why Your IRA, 401k, RRSP Are Not Safe in Today’s Investment World

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Before we dive into the subject of retirement investments, you must understand what they are. Here’s a brief explanation of each investment vehicle.

What is an IRA?

An Individual Retirement Account abbreviated as an IRA is a type of tax-advantaged account intended to help an individual put money aside for retirement. IRAs can be held in many different types of investments, and some of these investments might lose value. While the probability is low statistically, you could lose the entire balance of your IRA account.

What is a 401(k) plan?

A 401(k) plan is a tax-privileged, defined-contribution retirement account that is sponsored by many employers for their employees. It derives its name from a section of the U.S. Internal Revenue Service, (IRS) Code. Employees can make contributions to their 401(k) accounts through automatic payroll deductions. The employers can match some or all of those contributions. The investment revenues for the employees in a traditional 401(k) plan are only taxed when the employee withdraws that money from the 401(k) account, typically after retirement. In a Roth 401(k) plan, withdrawals can be tax-free.

What Is a Registered Retirement Savings Plan (RRSP)?

A Registered Retirement Savings Plan (RRSP) is a retirement savings and investing vehicle for employees and the self-employed in Canada pre-tax money is placed into an RRSP and grows tax-free until withdrawal, at which time it is taxed at the marginal rate. Registered Retirement Savings Plans have many features in common with 401(k) plans in the United States, but also some key differences.


Possible ways of losing your investment in an IRA


Having a narrow portfolio

The most common way to lose your account balance in your IRA account is by having the entire balance of your account invested in a single investment, and that investment loses its value by a steep drop in the share price of the company or the company in which the IRA amount was invested in goes out of business. You can reduce the risk exposure of a total-loss IRA scenario like this one by widening your portfolio. Either invest in mutual funds that hold stocks or bonds, or invest in many different individual stocks or bonds. If one individual investment loses all of its value, the others are likely to keep value, preserving some, if not most, of the value in your account.


Misrepresentations Regarding Custodial Responsibilities 

Fraudsters may misrepresent the duties of self-directed IRA custodians to deceive investors into believing that their investments are legitimate or protected against losses.  For example, fraudsters often claim or suggest that self-directed IRA custodians investigate and validate any investment in a self-directed IRA.  However, unlike custodians for other types of IRAs, self-directed IRA custodians are responsible only for holding and administering the assets in a self-directed IRA.  Self-directed IRA custodians generally do not evaluate the quality or legitimacy of any investment in the self-directed IRA or its promoters.  Furthermore, most custodial agreements between a self-directed IRA custodian and an investor explicitly state that the self-directed IRA custodian has no responsibility for investment performance.

IRS claims for back taxes

The Federal Government has the option of targeting your assets if they can lay claim to your back taxes. Your IRA account is fair game if they want to collect on your back taxes. So this is one way that can lead to an individual losing their entire IRA. They will initially, target your visible assets such as money in your bank account and then they can issue a levy against your retirement account and this can be up to 100% of their retirement savings if the account is still reading less than what I owe the IRS. Another point to note is that if the money is withdrawn from the IRA account before the holder is 59 years then the 10% penalty will apply to the account.

Back payments in child support

Child services can order your IRA to be seized by getting a domestic relations order from a court. The order will require the IRA plan administrator to transfer funds to the custodial parent. Other penalties you might incur include having your license withdrawn and your US passport revoked for having amassed back payments in child support.

Civil lawsuits

If you are on the receiving end of a civil lawsuit then you are IRA is potentially at risk as one of your assets. The law does provide some protection particularly the bankruptcy statute that allows you to protect up to 1.1 million of your retirement assets from creditors. For the most part, judges tend to side with the plaintiff with the intention of making them whole whether it’s because of a debt you owe or the lawsuit is for some injury you caused to the plaintiff. So it is important to properly plan for your IRA without having to seek bankruptcy protection which would put you in a severely limiting financial position.

Risks associated with currency and stock markets

In a hyperactive market where company stocks have been traded both locally and in foreign countries, it becomes very difficult to predict the stability of these stocks. Some IRA fund managers invest a lot in these stocks and the truth is it would be very difficult to make a correction in case of a catastrophe. It is for this reason that it is important to widen your stock portfolio and have your retirement savings put in different investment vehicles.

IRS seizures by the government

The government can require that IRAs be invested in US treasuries. This is equivalent to investing in the dollar. There is still an inherent risk with the government running these funds because the policies associated with these takeovers are dependent on partisan policy and whoever is in the office at that time, and the owner of the IRA has no say whatsoever on how the fund is managed or run. The government’s intention is to protect its citizens by taking over the management of the retirement accounts, but we shouldn’t overlook the risks associated with policy changes that affect the IRA accounts.

So those are some of our tips on how it is possible to lose your entire retirement account through no active fault of your own. To learn more about this subject, click here!


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