A recent Reddit thread in r/retirement captured the anxiety succinctly: 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 start of IRS-mandated withdrawals.
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 whether the retiree needs the cash or not.
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 sails past the $109,000 IRMAA threshold that governs 2026 Medicare premiums. Cross that line and the standard Part B premium of $203 per month jumps by a full tier surcharge. Up to 85% of Social Security benefits become taxable at the 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 approaches 40%. State income tax in California (cost-of-living index 110.72) or New York piles on more. The retiree paying taxes back at nearly double the 24% deferral rate faces a painful surprise.
Why Costa Rica Changes the Arithmetic
Relocating does not eliminate the RMD. US citizens owe federal tax on 401(k) withdrawals regardless of location. What Costa Rica changes is everything downstream of that number.
Costa Rica runs a territorial tax system: US Social Security, pensions, and 401(k) distributions are not taxed by Costa Rica at all. Establishing residency also severs ties to high-tax states, which typically stop taxing former residents once domicile is genuinely broken. That alone can save a California retiree 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 bar 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. Compare that against the BLS figure of $78,535 in average annual US household spending.
Healthcare is the other 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 system, at roughly 7% to 11% of declared income. Private supplemental coverage typically runs about $115 per month. Skipping Part B carries a late-enrollment penalty if the retiree ever moves back, a trade-off that must be modeled carefully.
Yield on the Other Side of the Move
With a lower cost basis for living expenses, the same portfolio throws off enough income to cover it. The 10-year Treasury sits near 4.57%, and Series I Bonds are paying a composite 4.26%, both dwarfing the FDIC national 12-month CD average of 1.65%. A $1.4 million portfolio held at that Treasury yield produces well above what a Costa Rica budget requires, letting the RMD itself get reinvested in a taxable account instead of funding the grocery bill. That matters because CPI at 332.6 continues to erode US purchasing power faster than the 2.8% COLA replaces it.
Three Moves to Make Before Age 73
- Run a Roth conversion ladder in the low-income window between retirement and 73. Every dollar converted at 12% or 22% 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 pulls the retiree back under the IRMAA line.
- 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.
- Decide on Medicare Part B with intent. If the plan is to stay in Costa Rica permanently, the $2,435 annual Part B premium plus any IRMAA surcharge is money spent on coverage that does not travel. If there is any chance of returning stateside, keep Part B and pay the surcharge as insurance against the late-enrollment penalty.
The Costa Rica move is a cost-of-living arbitrage that lets a $1.4 million saver absorb an inevitable RMD without watching Medicare, Social Security taxation, and state income tax compound against them at the same time.
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