Before Your First RMD at 73, Make Sure Your $1.4 Million 401(k) Isn’t Costing You $52,000 in Taxes

A recent Reddit thread in r/retirement captured the anxiety well: a 72-year-old with a seven-figure traditional 401(k) facing required minimum distributions next year. For a retiree sitting on $1.4 million in pre-tax dollars, that first RMD at 73 marks the end of tax deferral and the beginning of IRS-mandated withdrawals that arrive whether the money is needed or not.

The IRS Uniform Lifetime Table divisor at age 73 is 26.5, which turns a $1.4 million balance into a first-year RMD of roughly $52,830. That amount lands on the tax return as ordinary income, full stop.

The Tax Cascade Nobody Budgets For

A $52,830 RMD rarely arrives alone. Add Social Security (the 2.8% 2026 COLA lifts the average check), a modest pension, and some brokerage interest, and a single filer can sail past the $109,000 IRMAA threshold that governs 2026 Medicare premiums. IRMAA works as a cliff: crossing $109,000 by even one dollar pushes the standard Part B premium of $202.90 per month all the way up to $284.10, a jump of more than $81 monthly. Up to 85% of Social Security benefits also become taxable at that same income level.

Stack the federal 22% bracket, Social Security taxation, and IRMAA together and the effective marginal rate on the next dollar of RMD can approach 40%. State income tax in California or New York piles on further. The retiree paying taxes at nearly double the rate they deferred at faces a painful surprise at filing time.

Why Costa Rica Changes the Arithmetic

Relocating does not eliminate the RMD. US citizens owe federal tax on 401(k) withdrawals regardless of where they live. What Costa Rica changes is everything downstream of that number.

Costa Rica operates a territorial tax system, which means US Social Security, pensions, and 401(k) distributions are not taxed by Costa Rica at all. Establishing genuine residency also severs ties to high-tax states, which typically stop taxing former residents once domicile is broken. For a California retiree, that break alone can save several thousand dollars a year on the same $52,830 RMD.

The Pensionado visa requires proof of just $1,000 per month in lifetime pension or Social Security income, a threshold most $1.4 million savers clear easily. A single retiree can live on $1,600 to $2,200 per month in inland Costa Rica, with a comfortable couple’s budget around $2,500. That stands in sharp contrast to the BLS figure of $78,535 in average annual US household spending for 2024.

Healthcare is the other major lever. Medicare does not cover care outside the US, so many expat retirees drop Part B, avoid IRMAA surcharges entirely, and pay into Caja, Costa Rica’s public health system, at roughly 7% to 11% of declared income. Private supplemental coverage typically runs about $115 per month. Skipping Part B does carry a late-enrollment penalty if the retiree ever returns stateside, a trade-off that must be modeled carefully against long-term plans.

Yield on the Other Side of the Move

With a lower cost baseline, the same portfolio produces more than enough income to cover Costa Rica living expenses. The 10-year Treasury yield sits near 4.72%, and Series I Bonds are paying a composite rate of 4.26% through October 2026, both well ahead of the FDIC national 12-month CD average of 1.71%. A $1.4 million portfolio generating income near the Treasury yield produces well above what a Costa Rica budget requires, letting the RMD itself get reinvested in a taxable account rather than consumed by the grocery bill. That reinvestment capacity matters because persistent inflation continues to erode US purchasing power faster than the 2.8% COLA replaces it.

Three Moves to Make Before Age 73

1. Run a Roth conversion ladder during the low-income window between retirement and age 73. Every dollar converted at the 12% or 22% rate now is a dollar that never enters the RMD base. On a $1.4 million balance, shaving $300,000 off before 73 cuts the first RMD by more than $11,000 and can pull the retiree back under the IRMAA threshold.
2. Establish Costa Rica residency at least two calendar years before the first RMD. IRMAA uses a two-year lookback, so the tax year the RMD hits is the one Medicare will price off in 2027. Breaking state residency in the same window prevents California or New York from claiming the RMD as sourced income.
3. Decide on Medicare Part B with genuine intent. If the plan is to remain in Costa Rica permanently, the $202.90 monthly Part B premium plus any IRMAA surcharge is money spent on coverage that does not travel. If there is any realistic chance of returning stateside, keeping Part B and paying the surcharge functions as insurance against the late-enrollment penalty that would otherwise follow.

The Costa Rica strategy is fundamentally a cost-of-living arbitrage. It lets a $1.4 million saver absorb an inevitable RMD without simultaneously facing compounding pressure from Medicare surcharges, Social Security taxation, and state income tax all hitting at once.

Editor’s note: This pass updated the 10-year Treasury yield from 4.57% to 4.72% and the FDIC national 12-month CD average from 1.65% to 1.71%, reflecting August 2026 market data. The Medicare Part B standard premium was corrected to its exact 2026 figure of $202.90 per month, and the IRMAA cliff mechanic was clarified to show the full premium jump triggered by crossing the $109,000 threshold.

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