Monday, May 11, 2009

Reverse dollar cost averaging

Required minimum disbursements on tax-deferred retirement accounts leads to reverse dollar cost averaging. Because you're forced to sell a certain amount regardless of what the market does, you end up selling more assets when the prices are low, and less when they're high--which is exactly the reverse of what you should be doing. They added a temporary waver to the law this last year, because of the late unpleasantness, but I think a better solution would be to make a permanent feature to fix the problem.

You can see why Uncle Sam wants his deferred taxes, but you also don't want to make people sell at a loss. So here's my plan: make the required minimum distributions on a rolling, multi-year basis. So the minimum distribution would be for example, $15,000 spread over three years. The minimum distribution could be taken at any point during that cycle or spread throughout it. At any rate, it would allow people to avoid taking withdrawals during down periods that don't merit a special dispensation.


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