Is the cash in your retirement account actually costing you money?

Last reviewed: July 2026

Yes, and most retirees holding excess cash don’t realize it until the tax bill shows up. Cash in a retirement account earns less than invested assets grow over time, and that’s the visible cost. The hidden one hits when the IRS starts requiring you to pull money out at age 73. If your balance skews cash-heavy, your required minimum distributions can push more ordinary income into a higher bracket than a properly invested portfolio would.

Cash drag is the performance gap between money held in cash-equivalent positions (money markets, stable value funds, uninvested settlement funds) and the same money deployed in your stated asset allocation. In a taxable account, it’s an opportunity cost. In a tax-deferred retirement account subject to required minimum distributions, it’s a compounding problem that gets worse every year you don’t address it.

Key Takeaways

• Cash drag is the gap between idle cash and your target allocation; in retirement it compounds into a real shortfall.
• The IRS requires minimum distributions from traditional retirement accounts starting at age 73, regardless of how much you hold in cash.
• At age 73 the IRS Publication 590-B factor is 26.5, so a $1,000,000 balance produces a $37,736 RMD taxed as ordinary income.
• Missing an RMD triggers a 25% IRS excise tax, dropping to 10% if you correct it within two years.
• Cash above roughly 5-7% with no job and no deadline is dead weight dragging on your retirement.

About the Author

About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is a financial planner who writes Viewpoints for JeffJudgeCFP.com. He helps families and business owners right-size retirement cash and plan around required minimum distributions before the tax bill arrives, using the R.U.D.D.E.R. Method™, the financial planning process Jeff developed. “Cash feels safe because it doesn’t go down in price. In a retirement account with mandatory distributions, that comfort carries a price most people never see.”

What Is Cash Drag, and Why Does It Hit Harder in Retirement?

In the accumulation phase, cash drag is an inconvenience. You’re holding 10% in cash, your portfolio underperforms by a point or two, and you adjust. In retirement, the cost structure changes.

Your spending is real and ongoing. Your RMD is mandatory and calculated from your total balance, not just the invested portion. The gap between what your portfolio earns and what inflation quietly erodes gets narrower every year you hold too much idle cash.

The practical math: a retiree holding 20% of a $1 million portfolio in cash equivalents earning 4-5% earns roughly $8,000-10,000 annually on that position. The same $200,000 in a diversified equity allocation might compound at a materially higher rate over a 15-20 year retirement. That gap, sustained over a decade, is a real portfolio shortfall. Not a market loss. A decision loss.

Cash drag doesn’t show up on a performance report labeled “cash drag.” It shows up as the retirement you didn’t fully fund.

Does holding more cash lower your required minimum distribution?

No. RMDs are calculated from your total account balance and an IRS life expectancy factor, not from how the money is invested. Holding cash leaves you with a slower-growing balance and the same mandatory taxable withdrawal, so it adds cost without reducing the distribution you owe.

How do required minimum distributions turn idle cash into a tax problem?

The IRS requires withdrawals from traditional IRAs, 401(k)s, and most employer-sponsored plans starting at age 73 under current law. The amount you must withdraw each year is calculated by dividing your prior December 31 account balance by a life expectancy factor from IRS Publication 590-B. At age 73, that factor is 26.5.

Here’s what that looks like across different account sizes:

The IRS factor decreases each year, so your RMD grows as a percentage of your remaining balance over time.

If you miss an RMD, the IRS assesses a 25% excise tax on the amount you should have withdrawn. That penalty drops to 10% if you correct the error and take the missed distribution within two years. Either way, it’s a penalty on an oversight that could have been avoided with basic planning.

Here’s the cash-specific problem: a cash-heavy portfolio that compounds more slowly may produce a smaller nominal account balance over time. But RMDs aren’t calculated based on investment performance. They’re based on your total balance. You don’t get a lower RMD for holding cash. What you do get is a portfolio that grows more slowly while still generating the same mandatory taxable withdrawal obligation as a well-invested one.

How do you run a three-step diagnostic on your retirement cash?

If you’re not sure whether you’re holding too much, run this quickly.

Step 1: Calculate your actual cash percentage. Add up everything in money market funds, stable value funds, cash equivalents, and uninvested settlement funds across all retirement accounts. Divide by your total balance. Anything above 5-7% without a specific purpose attached to it deserves a second look.

Step 2: Map each cash position to a purpose with a timeline. Good reasons to hold cash in a retirement account include covering 12-18 months of planned withdrawals, bridging a known large expense, or sitting idle during a deliberate rebalancing window. If your cash doesn’t have a job with a deadline, it’s dead weight.

Step 3: Run your RMD projection using the IRS factor for your current age from Publication 590-B. Combine that with Social Security, any pension, and other income sources. If the total puts you near a tax bracket threshold, excess cash that isn’t growing efficiently is making your tax situation worse, not just neutral.

When does holding cash in a retirement account actually make sense?

Cash has a legitimate role in retirement. The problem isn’t the cash itself. It’s cash without a plan.

The dividing line is intention and timeline. Cash with a job and a deadline is a buffer. Cash without either is a drag on everything it touches.

How much cash should you actually keep in a retirement account?

Enough to cover a defined need with a deadline, and no more. A common range is 12 to 18 months of planned withdrawals as a buffer against selling into a downturn. Beyond a specific purpose, cash above roughly 5 to 7 percent of the account usually deserves a second look.

Frequently Asked Questions

What is cash drag in a retirement account?

Cash drag is the performance gap between money sitting in cash equivalents, like money market or stable value funds, and the same money invested in your target allocation. In a tax-deferred account facing required minimum distributions, that gap compounds into a real shortfall over a long retirement.

At what age do required minimum distributions start?

Under current law, the IRS requires minimum distributions from traditional IRAs, 401(k)s, and most employer plans beginning at age 73. Each year’s amount equals your prior December 31 balance divided by an IRS life expectancy factor from Publication 590-B, which is 26.5 at age 73.

What is the penalty for missing a required minimum distribution?

Miss an RMD and the IRS assesses a 25% excise tax on the amount you failed to withdraw. The penalty drops to 10% if you correct the shortfall and take the missed distribution within two years. Either way, it is an avoidable cost on a simple oversight.

How should you reduce excess cash in a retirement account?

Start by finding why the cash is there, then move it gradually. Dollar-cost averaging the excess into your target allocation over 6 to 12 months eases the pressure of picking a day. Run a tax projection first, since a large year-end reallocation can land you in a higher bracket.

What should you do if you’ve been sitting on too much cash?

Start by figuring out why it’s there. If it’s inertia (contributions that never got allocated, a distribution that landed in settlement and stayed), that’s straightforward to fix. If it’s fear of deploying at a market peak, that’s also solvable, but the approach is different.

Don’t move it all at once. Dollar-cost averaging your excess cash into your target allocation over 6-12 months reduces the pressure of picking the right day. It’s not the mathematically optimal approach in every scenario, but it beats holding cash indefinitely because you couldn’t decide.

Run the tax projection before you act. If you’re in a year where additional income pushes you toward a higher bracket, a large reallocation in December that generates fund distributions may not be the right timing. The sequence of decisions matters as much as the decisions themselves.

Cash feels safe because it doesn’t go down in price. But in a retirement account with mandatory distributions and a finite runway, the real risk isn’t volatility. It’s running short before you run out of time. Excess cash in your retirement accounts accelerates that risk quietly, without a red line on any chart.

If you want to run these numbers for your specific situation, schedule a no-obligation call with Jeff.

The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn’t guarantee future results. Consult with qualified financial professionals regarding your specific situation. Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a registered investment advisor and separate entity from LPL Financial. © 2026 JeffJudgeCFP.com | Not to be reproduced in whole or in part. All rights reserved.