Avoiding Buyout Scams

Many companies that are downsizing or closing plants are offering a lump sum buyout or severance payment to certain employees. All too often the employees that accept these buyouts are the targets for scams. This is especially true if the news of the downsizing has been reported in the local media.

First, it is important to differentiate between the types of payouts employees might receive when their company downsizes. Most employees have a pension or 401(k) retirement program which is eligible for distribution when an employee leaves a company. It is critical to remember that this money is for retirement and should be rolled over into another retirement account. If you don’t, you will owe tax on all your funds (this money was set aside for you on a pre-tax basis) plus a penalty on early withdrawal.

Another lump sum payment is a severance package. This is usually offered as an enticement for employees to leave and is taxable income. Whether you are receiving your retirement distribution, a severance payment, or both, you will be receiving a large amount of money that put you at risk for fraud. Many people receiving these payments are concerned about their future, which makes them vulnerable to “get rich quick” schemes and scams.

Here are some tips and things to watch out for:

• Watch out for someone who offers you high, guaranteed rates of return with no risk.
• Beware of investments that you don’t understand or that sound too good to be true.
• Watch out for investments that have to be made immediately or they will go away.
• Check out both the investment and the person offering the investment.
• In general, it is a good idea to stick with well known financial institutions.
• Don’t act too quickly. You don’t have to invest your money right away. Put it in a savings account and then carefully consider your investment options.
• Consider paying off some debt and keeping some money in a savings account you can access quickly if you need to.