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required minimum distribution (RMD) rule would result in a 50 percent tax penalty on the amount that should have been withdrawn, which in Rao's case is about $9,000.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.

In the absence of a clear sign that the Treasury or Congress will move on this before the end of this year, I turned to some financial advisers to offer Rao tips on what he can do to soften the blow.

Mike Martin, founder and president of Mike Martin & Associates in Independence, Mo., said Rao should wait until mid- to late December to withdraw any of the money "if it is believed that the markets will go up from here to then." And some people do believe that will be the case.

Nicholas Yrizarry, founder of Nicholas Yrizarry & Associates in Reston, said Rao should ask if he can take his RMD as shares from his funds rather than in cash. He can then sell those shares when the values recover rather than do so at such a low point, Yrizarry said. However, many plan providers do not offer that as an option. "It wouldn't hurt to ask," Yrizarry said.

Chris Reilly, senior vice president with Firstrust Financial Resources in Philadelphia, said Rao should also take a closer look at his retirement plans. "The 35 percent decline suggests predominately stock funds," he said.

Yrizarry agreed that Rao's portfolio seemed too stock-heavy for a person his age. "The rule of thumb is to have less exposure to the stock market as a client gets older to mitigate this kind of problem," he said.

Rao said his mutual funds are 70 percent in stocks and 30 percent in bonds. He said he realizes that is a problem. "I am thinking of reallocating the funds as 50 percent in stocks and bonds respectively," he said.

Not so fast, Yrizarry said. "I wouldn't suggest that he reallocate his portfolio 50-50 at this time because this would mean that he's selling stocks while they're low and buying bonds while they're higher," he said. "Before revamping his asset allocation, it would make sense to do a more in-depth analysis of his tolerance for risk, cash-flow needs and his other pending household expenses."

And who knows? Maybe the Treasury or Congress will step in with some relief.