The RMD you didn't ask for isn't an investment decision
Required minimum distributions force money out of a 401(k) whether you need it or not. Most projections quietly reinvest the surplus at the market return. That one assumption can overstate late-life wealth by a third.
Pre-tax retirement money comes with a deal. You got a deduction when it went in, it grew untaxed for decades, and in exchange the IRS eventually tells you to start taking it out. That instruction is the required minimum distribution, and for most people it starts at 73 or 75 and gets bigger every year after.
The IRS makes you withdraw the money. It does not make you spend it. And what a projection assumes happens to the part you did not need turns out to be one of the largest assumptions in a long-range retirement plan, and one of the least discussed.
What the rule actually says
Each year from your applicable age, you must take out at least your 401(k) or traditional IRA balance from the previous 31 December, divided by a factor from the IRS’s Uniform Lifetime Table. The factor is 26.5 at 73 and 24.6 at 75, and it shrinks every year. So the required fraction grows: about 3.8% at 73, 4.1% at 75, 4.9% at 80, 8.2% at 90.
The applicable age depends on your birth year, under SECURE 2.0:
| Born | RMDs start at |
|---|---|
| 1950 or earlier | already started (72 or earlier) |
| 1951–1959 | 73 |
| 1960 or later | 75 |
Governmental 457(b) plans are covered too. People who think of the 457(b) as the flexible account, the one with no early-withdrawal penalty, often forget it has RMDs like any other pre-tax plan. Roth IRAs never had them, and Roth 401(k)s have been exempt since 2024.
Two practical details catch people. The first RMD can be delayed until 1 April of the following year, but the second is still due by 31 December of that same year. Delay the first and you take two in one tax year, often into a higher bracket. And the penalty for missing one is 25% of the shortfall, reduced to 10% if you correct it promptly.
The money has to land somewhere
Here is a household that is not unusual. They are 60, so born in 1966, with $800,000 in a 401(k) and $150,000 in a brokerage account. They are still putting $23,000 a year into the 401(k), and they plan to stop work at 65. They want to spend $55,000 a year in today’s money, with $32,000 of Social Security from 67. Markets return 7% and inflation runs at 2.5%.
By 75, their first RMD year, the plan needs about $80,000 from savings on top of Social Security. It would take that from the 401(k) and the brokerage in proportion, so about $45,500 of it would come from the 401(k). The IRS requires $72,051. So $26,550 leaves the 401(k) that the plan did not need, gets taxed as ordinary income, and leaves $20,709 sitting in a bank account.
That first surplus is small. The ones after it are not:
| Age | RMD | Forced out beyond the plan’s need | Lands in cash after tax |
|---|---|---|---|
| 75 | $72,051 | $26,550 | $20,709 |
| 80 | $99,821 | $51,718 | $40,340 |
| 85 | $136,279 | $87,175 | $67,996 |
| 90 | $179,028 | $131,498 | $102,568 |
| 95 | $218,240 | $176,116 | $137,371 |
By 90, this household is being forced to take out more than $130,000 a year that it has no plan for. From 75 to 90 that adds up to more than $1.1 million forced out beyond the plan, just over $900,000 of it after tax, and all of it went somewhere.
The question every projection has to answer is: where?
Where most tools put it
The easy answer, and the most common one, is to put it back into the investment portfolio. The surplus leaves the 401(k), gets taxed, and goes into the brokerage account, where it earns the same 7% as everything else.
That is a decision, and it is presented as though it were not one. In real life, an RMD lands in the account your provider sends it to, usually a money market or a checking account. Turning it into an equity position again takes someone choosing to do that, every year, for the rest of their life, at 80, at 88, at 94. Plenty of people do. Plenty more leave it in the bank, because at 85 with a growing cash balance, keeping it in the bank is a perfectly reasonable choice.
This site used to make the easy assumption too. In September we changed it: the after-tax surplus of a forced RMD now lands in cash and earns your savings rate, 2% by default, not the market return. The change made one of our reference households 30% poorer at 100. Here is what it does to this one:
| What the forced money earns | Total at 90 | Total at 100 | At 100, in today’s dollars |
|---|---|---|---|
| 2% (cash) | $3,670,249 | $4,539,883 | $1,690,791 |
| 4% (a high-yield account) | $3,782,622 | $5,042,653 | $1,878,038 |
| 7% (reinvested in the market) | $3,988,850 | $6,106,196 | $2,274,135 |
The two ends differ by 9% at 90 and 34% at 100, which is $1.57 million in the year it’s paid, or $583,000 in today’s money. That is not an argument about market returns or about whether 7% is optimistic. Same household, same markets, same taxes. The only difference is what the money does after the IRS has made it move.
It also explains why the gap appears so late. Up to the late 70s the surpluses are small and the gap is a rounding error: at 80 the totals differ by less than 1%. The damage builds because the surplus grows every year and each year’s surplus compounds for longer than the last.
Which number is right
Neither, on its own. The cash number is right for someone who will let RMD money pile up in the bank. The 7% number is right for someone who will reinvest every surplus, every year, in the same mix as the rest of their portfolio, and keep doing it into their nineties. The mistake is letting a calculator pick for you without saying so, because the difference is large enough to change real decisions: how much to spend at 70, whether to help the children with a house, whether a Roth conversion is worth doing.
The cash assumption is the cautious one, and it is what this site uses. If you know you will reinvest, set your savings rate to match, or read the projection knowing it understates you at the far end.
Two notes on the cash assumption. First, at the default 2% the cash is losing to 2.5% inflation, so the real total actually starts falling after about 95. If you keep RMD money in a high-yield account, set the rate to what you actually earn. Second, the plan spends from cash in proportion like any other account, so the pile is not as dead as it might seem: by 90 it is paying part of the bills.
The cohort line
Being born in 1959 or 1960 decides whether RMDs start at 73 or 75. For this household, starting at 73 means a first RMD of $61,410 two years earlier, and about $22,000 more forced out by 85. The difference at 100 is smaller than you might expect, $4.47 million against $4.54 million, because the later start produces bigger RMDs once it begins. The two years matter more for taxes in those particular years than for the total.
If your birthday is near that line, check it rather than assuming. The RMD tab reads your birth year from the age on the Assumptions tab and flags it if you are close.
What you can actually do with the surplus
The money has to come out. What happens next is up to you, and there are better choices than letting it sit by accident.
Reinvest it on purpose. If you don’t need it and want it invested, you can take an IRA RMD in kind: shares move from the IRA to a taxable brokerage account without being sold. You pay the income tax on their value, but you are never out of the market and there is no cash to forget about.
Give it away directly. From 70½, a qualified charitable distribution sends money from an IRA straight to a charity, up to a little over $100,000 a year (indexed to inflation). It counts toward the RMD and never shows up as income. For anyone who gives already, this is usually the best use of an RMD there is. It applies to IRAs, not 401(k)s, which is one reason people roll a 401(k) into an IRA after 59½, once the Rule of 55 no longer matters.
Make the RMDs smaller before they start. The surplus exists because the pre-tax balance is large relative to spending. The years between retiring and your first RMD are often the lowest-tax years of your life, and Roth conversions in those years shrink the balance the RMDs are calculated on. That deserves a post of its own.
If you are still working, check the exception. You can delay RMDs from your current employer’s 401(k) until you retire, unless you own more than 5% of the company. It does not apply to IRAs or to old employers’ plans.
What this is assuming
One flat tax rate on the forced money. The surplus is taxed at your retirement rate, 22% here. In practice a growing RMD can push you into a higher bracket, and above about $206,000 of income for a married couple it raises Medicare premiums through IRMAA. Both make the forced money more expensive than shown, so if anything, the figures above flatter the surplus.
No still-working exception. The projection takes RMDs at the applicable age whether or not you are still employed. If you will work past 73 or 75 at a company you do not own, your real RMDs from that plan start later.
One cash rate for all the cash. The engine projects aggregated balances, so RMD money and any savings account you already hold earn the same blended rate.
A flat return. The usual caveat: 7% every year hides the order returns arrive in. The Monte Carlo tab runs the same plan through random markets. Note that it deliberately does not give cash a random return. Holding cash is a way of not participating in the market, and the simulation respects that.
What to do with this
Put your own figures into the calculator and open the RMD tab. It shows your applicable age, the RMD every year to 100, and the total income each year including whatever is forced out above your spending. If the RMD column runs well ahead of what you spend, you are one of the households this post is about.
Then decide what that money will do, deliberately, before the first RMD rather than after the fifteenth. Give it, reinvest it, convert ahead of it, or keep it in cash because you would rather have it there. All four are reasonable. The only bad option is the one most calculators make for you without telling you.
If you are wondering what else the projection assumes, what the projection actually assumes covers the rest.
A standing caveat. These are projections, not predictions, and every figure here came out of one household’s assumptions. Nothing on this site is financial, tax or legal advice, and no calculator knows what the next thirty years of markets will do, including this one. Use it to understand the shape of the problem, then talk to someone who is licensed to advise you on your own.