For Many Seniors, an Ominous Retirement-Account Deadline

By Nancy Trejos
Sunday, November 16, 2008

Ramana K. Rao is running out of time.

Like millions of other retirees older than 70 1/2 , he is required to take money out of his 401(k) and IRA by Dec. 31 of each year. But the amount he has to take out is based on his balance at the end of 2007. And the market sure looked a lot better last year than it does this year.

"Both those accounts are in mutual funds, and I lost 35 percent of the money so far," the 74-year-old Germantown resident wrote to us. "What should I do?"

Ignoring the so-called required minimum distribution (RMD) rule would result in a 50 percent tax penalty on the amount that should have been withdrawn, which in Rao's case is about $9,000. That would be a $4,500 hit.

Yes, this is a curious law, and the reason it exists is simple: The federal government wants its share of this money, which in many cases it has waited decades to collect any taxes on.

Rao, a retired engineer, is hoping that maybe, just maybe, he won't have to take any of his money out this year. That's because he heard President-elect Barack Obama, while on the campaign trail, propose a temporary suspension of the rule.

He also heard about Congress's efforts to help retirees like him. Reps. George Miller (D-Calif.), chairman of the House Education and Labor Committee, and Rob Andrews (D-N.J.), chairman of the subcommittee on health, employment, labor and pensions, have asked Treasury Secretary Henry M. Paulson Jr. to suspend the requirement. The advocacy group AARP, which represents people 50 and older, has also sent a plea to Paulson.

Rao likes this idea because he can afford to do without his 401(k) and IRA money and live instead on Social Security and his pension. He can also postpone a few planned projects such as a new deck for the back of his house that would have cost $8,000 and a vacation he was hoping to take with his wife.

"Hopefully, the value of my retirement savings would improve by the end of next year so that we could implement those two projects," he said.

So what is the likelihood of Paulson acting on the Miller-Andrews request?

Treasury Department spokesman Andrew DeSouza said Friday that the agency is aware of the issue and looking into it. When I asked DeSouza for a timeline, he said he did not have one.

Congress could end up taking up the issue when it returns tomorrow for its lame-duck session. Unfortunately for Rao, though, any legislative action is more likely next year.

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