Your Retirement Accounts Are Not Worth What You Think They Are

One of the most common mistakes we hear from expats planning their Panama move is a version of this: “We have $800,000 in our 401(k), so we’re good.” They’re not wrong — but they’re also not right. That $800,000 is pre-tax money. The IRS is a silent partner in every traditional retirement account you own, and they’re going to collect their share whether you want them to or not.

Finance & Money in Panama Series

Thirteen articles covering everything you need to know about managing your money before, during, and after your move to Panama.

1. The Real Numbers: Our 13-Part Guide to Finances, Money, and Budgeting in Panama
2. Taxes in Panama: What the Territorial System Actually Means for American Expats
3. Banking in Panama: The Truth Behind the Social Media Fear
4. What Does It Actually Cost to Live in Panama City?
5. What Buying a Home in Panama Actually Costs You
6. Financing a Home in Panama
7. Home & Auto Insurance in Panama
8. Healthcare Costs in Panama
9. Travel Within Panama: Getting Around
10. ATMs, Wire Transfers, Wise, and Getting Your Income Here Reliably
11. Estate Planning for Gay Couples in Panama
12. Can a Foundation Let My Partner Inherit Our Panama Property Without Probate
13. Your Retirement Accounts Are Not Worth What You Think — RMDs, Taxes & Medicare You are here
14. Building Your Reserve in Panama: The Financial Cushion That Makes a Retirement Budget Actually Work

This guide is not tax advice. We’re gay expats who have spent time with spreadsheets and financial planners, not CPAs. What we can do is give you a clear, honest picture of how the system works — the mechanics of required withdrawals, the tax hit they carry, and the often-overlooked Medicare surcharge that can quietly add thousands of dollars a year to your costs. We’ll be direct about the complexity and equally direct about why you need a qualified tax accountant in your corner before you finalize any retirement plans.

The punchline is simple: the amount in your retirement accounts is not the amount you can spend. There are two layers of reduction — taxes on what you withdraw, and potentially higher Medicare premiums triggered by the income those withdrawals create. Understanding both layers before you retire, not after, is what separates a comfortable Panama life from one full of unpleasant surprises.

The Three Account Types — and Why It Matters Which One You Have

Before we get into required withdrawals and tax bills, it helps to understand what you actually have. Most American retirees hold money in some combination of three types of accounts, and they behave very differently in retirement.

Traditional 401(k) and Traditional IRA

A traditional 401(k) is an employer-sponsored retirement account funded with pre-tax dollars. You didn’t pay income tax when the money went in — which means every dollar you take out in retirement gets taxed as ordinary income. The same logic applies to a traditional IRA (Individual Retirement Account), which you may have opened independently or rolled an old 401(k) into.

These accounts grow tax-deferred, meaning you owe nothing while the money sits there. But the IRS has a long memory. When you eventually withdraw — voluntarily or because you’re required to — you pay income taxes on the full amount withdrawn, at whatever tax bracket you’re in that year. These are the accounts that generate Required Minimum Distributions, which we’ll cover in depth below.

Roth IRA

A Roth IRA is the opposite structure. You contribute after-tax dollars, the money grows tax-free, and qualified withdrawals in retirement are completely tax-free. A Roth IRA also has no Required Minimum Distribution requirement during your lifetime — you are never forced to take money out. This makes it the most flexible account type in retirement and a powerful planning tool.

There’s a catch: Roth IRAs have income limits for contributions. In 2026, you can’t contribute directly to a Roth IRA if your modified adjusted gross income exceeds $165,000 as a single filer or $246,000 for married filing jointly. High earners sometimes use a “backdoor Roth” strategy — contribute to a traditional IRA and then convert it — but that conversion triggers taxes in the conversion year. A tax professional can help determine if this makes sense for your situation.

SEP-IRA and SIMPLE IRA

Self-employed expats and small business owners may have a SEP-IRA or SIMPLE IRA. These are also pre-tax, traditional IRA-style accounts subject to RMDs. They follow the same rules as a traditional IRA for purposes of this guide.

Required Minimum Distributions — The IRS Collects What’s Owed

When you have a traditional IRA, 401(k), SEP-IRA, or SIMPLE IRA, the government lets you defer taxes for decades. But that deferral has an end date. Starting at a certain age, you are legally required to begin withdrawing a minimum amount every year. These withdrawals are called Required Minimum Distributions, or RMDs.

When Do RMDs Start?

This changed with the SECURE 2.0 Act, so pay attention to which rule applies to you. If you were born between 1951 and 1959, your RMDs begin at age 73. If you were born in 1960 or later, your RMDs begin at age 75. The RMD rules that applied to people who turned 70½ before 2020 are a different story — if that’s you, your situation requires a conversation with your accountant.

Your first RMD can technically be delayed until April 1 of the year after you hit the required age. But there’s a trap in that option: if you delay the first one, you’ll owe two RMDs in the same calendar year — the delayed first one and the second one, due December 31. Two RMDs in one year means double the taxable income, which can push you into a higher tax bracket and trigger or worsen Medicare surcharges. Most financial advisors suggest taking the first RMD in the year you turn 73 or 75 to avoid this problem.

How the IRS Calculates What You Must Take

The RMD formula is straightforward: you divide your account balance from December 31 of the previous year by a “distribution period” factor from the IRS Uniform Lifetime Table. That factor is based on your age and essentially represents the IRS’s estimate of your remaining life expectancy. The older you get, the smaller the divisor, and the larger the percentage you’re required to withdraw.

Here is the real-world application. If you’re 73 and your IRA had a balance of $500,000 at the end of last year, the IRS distribution period factor for age 73 is 26.5. Your required withdrawal is $500,000 ÷ 26.5 = $18,868. That entire $18,868 is added to your taxable income for the year.

The IRS Uniform Lifetime Table — Key Ages

The distribution period shrinks every year you age, meaning your required withdrawal percentage grows over time. Here’s how it plays out at key retirement ages, using a $500,000 account balance for comparison:

Notice how the percentage climbs. At 73, you’re pulling out under 4%. By 85, it’s over 6%. By 90, over 8%. The IRS designed the table to ensure the full account balance is distributed — and taxed — over your expected lifetime. If your account continues to grow at a rate faster than the required withdrawal percentage, the absolute dollar amount of your RMDs can actually increase year over year.

What Happens If You Miss an RMD

The penalty for failing to take a required minimum distribution is steep: 25% of the amount you should have withdrawn but didn’t. If you catch the mistake and correct it within two years, the penalty drops to 10%. Either way, the original withdrawal still gets taxed as ordinary income on top of the penalty. Missing an RMD is not a technicality — it’s expensive.

The Tax Reality — RMDs Are Ordinary Income

Here is the piece of the puzzle that quietly surprises a lot of retirees: every dollar you withdraw from a traditional IRA or 401(k) is taxed as ordinary income, at your regular income tax rate. Not capital gains rates. Not some special retirement rate. The same rates that apply to a salary or consulting income.

The 2026 federal income tax brackets for ordinary income have seven tiers, ranging from 10% to 37%. The Tax Cuts and Jobs Act rate structure was made permanent in 2025 under the One Big Beautiful Bill Act, so these rates are not expiring. Here’s how the brackets look for 2026:

The standard deduction for 2026 is $16,100 for a single filer and $32,200 for married filing jointly — these amounts reduce your taxable income before the brackets apply. Most retirees are well past the age 65 threshold that adds an extra standard deduction amount, which helps a bit. But the core point stands: your RMDs land on top of Social Security income, any pension income, and any other earnings, and together they determine your tax bracket for the year.

The Marginal vs. Effective Rate Distinction

One thing that trips people up is confusing marginal and effective tax rates. Your marginal rate is what applies to the last dollar of income. Your effective rate is the actual percentage of your total income you pay in taxes. Because the system is graduated — meaning only income above each threshold is taxed at that bracket’s rate — your effective rate is always lower than your marginal rate.

A retired couple filing jointly with $120,000 in taxable income pays 10% on the first $24,800, 12% on the next $76,000, and 22% on the remaining $19,200. Their marginal rate is 22%, but their effective rate is around 14% — considerably lower. The distinction matters enormously when planning how much of your account balance you can actually access in a given year.

What a Large IRA Can Mean in Real Taxes

The tax math gets serious when the account balance is large. Let’s work through a realistic example for a couple who has saved well.

That couple pays roughly $5,700 in federal income taxes — which sounds manageable. But watch what happens if they have $2 million in IRAs instead of $1.2 million, or if one partner has a pension in addition to Social Security. The income layers stack quickly, and the tax consequences compound. This is why account balance alone tells you very little about what you’ll actually net.

Medicare IRMAA — The Premium Surcharge Nobody Warned You About

Here’s where the second layer of reduction hits, and where we’ve found the most retirees are genuinely blindsided. Medicare is not free, and it’s not flat-rate. Higher-income retirees pay significantly more for Medicare Parts B and D through what’s called IRMAA — the Income-Related Monthly Adjustment Amount.

IRMAA is a surcharge added to your standard Medicare premiums when your income exceeds certain thresholds. In 2026, the standard Part B premium is $202.90 per month. But if your income is high enough, that number jumps — dramatically. The top tier for 2026 is $689.90 per month for Part B alone. Per person.

The Two-Year Lookback — The Trap Nobody Sees Coming

Here’s the mechanism that catches people off guard: Medicare doesn’t look at your income this year. It looks at your income from two years ago. Your 2026 Medicare premiums are based on your 2024 tax return. This creates a planning lag that works against people who retire mid-career, sell a business, take a large Roth conversion, or inherit money.

Practically, this means a retiree who had a final working year with high income in 2024 will pay elevated Medicare premiums in 2026 even if their 2025 and 2026 income are far lower. Good news: there is a formal appeals process using IRS Form SSA-44 for certain qualifying life-changing events (like retirement) that allows you to request a reassessment using more recent income data.

The 2026 IRMAA Brackets — What You’ll Actually Pay

IRMAA applies to Medicare Part B and Part D premiums. There are five surcharge tiers above the base premium, and crossing any threshold triggers the full surcharge for that tier — not a graduated increase. Crossing a line by one dollar means you owe the full surcharge for the entire year. The income used is your Modified Adjusted Gross Income (MAGI) from two years prior, and it includes traditional IRA withdrawals, Social Security, interest, dividends, capital gains, and rental income.

A couple where both partners are on Medicare and both cross into Tier 1 IRMAA will pay approximately $2,296 more per year in combined Medicare premiums than they would below the threshold — for Tier 1 alone. At the top tier, the combined additional cost for a couple is nearly $14,000 per year. These are real dollars that reduce what you have available for rent, food, travel, and the life you planned.

How RMDs Feed the IRMAA Machine

The connection between RMDs and Medicare premiums is direct. Every dollar you withdraw from a traditional IRA or 401(k) becomes part of your MAGI — the figure Social Security uses to determine your IRMAA tier. If your RMDs push your income over the $109,000 single or $218,000 joint threshold (using 2026 thresholds), you’ll see a Medicare premium increase two years later. If they push you higher, the surcharge grows.

This is why retirees with substantial traditional IRA balances can find themselves in a situation where the mandatory nature of RMDs works against them. You may not need the money. You may not want to take it out. But the IRS requires it, and that required withdrawal may bump your Medicare premiums the year after next.

That $400,000 difference in IRA balance doesn’t just mean a larger RMD — it means a larger RMD that crosses an IRMAA threshold, adding over $1,100 in Medicare costs on top of the additional income taxes owed. The effects compound.

What This Means in Plain Language — The Full Picture

Let us try to put all of this together honestly, without oversimplifying the complexity but also without hiding the central point behind jargon.

If you have $800,000 in a traditional IRA and zero dollars in a Roth IRA, here is the reality. You do not have $800,000 to spend in retirement. You have $800,000 minus whatever taxes you’ll owe on withdrawals, minus whatever Medicare surcharges your income triggers. The exact amount you net depends on your tax bracket, your other income sources, your filing status, your age, and whether your withdrawals push you over IRMAA thresholds. It’s not a simple number — but it’s almost certainly less than $800,000.

A reasonable back-of-envelope approach for a middle-bracket retiree: assume 15–25% of your traditional IRA balance will go to federal income taxes over the course of your retirement, depending on your bracket. That’s not precise — it varies enormously based on individual circumstances — but it reframes the planning conversation. An $800,000 account might net $600,000–$680,000 in spendable dollars, not $800,000. And that’s before any state income taxes (though Panama is not a U.S. state, so U.S. expats who have properly established non-resident status face no state income tax — your accountant should confirm your specific situation).

Planning Strategies — What Good Looks Like Before You Retire

We want to be clear: what follows is a description of strategies that exist, not a recommendation for any particular strategy. The right approach for you depends on facts we don’t know — your account balances, your income mix, your spouse’s situation, your state of residence before the move, your expected lifespan, and your goals. A qualified tax accountant who understands expat retirement planning should be guiding these decisions.

Roth Conversions Before RMDs Begin

The years between retirement and the age when RMDs begin are often the most valuable years for tax planning. If you retire at 65 but RMDs don’t begin until 73 or 75, you may have a window of eight to ten years with relatively low taxable income. Converting portions of your traditional IRA to a Roth IRA during those years means you pay taxes on the conversion now, at what may be a lower rate than you’d pay on forced RMDs later. The Roth balance then grows tax-free and never requires mandatory distributions during your lifetime.

The tradeoff is that Roth conversions increase your income in the conversion year. Done carelessly, a large conversion can push you into a higher bracket, trigger IRMAA, or make more of your Social Security benefit taxable. Done carefully, in amounts targeted to fill your current bracket without crossing a threshold, conversions can significantly reduce your lifetime tax burden.

Managing IRMAA Thresholds Deliberately

Because IRMAA is a cliff structure — cross the line by one dollar, owe the full tier — careful income management near the thresholds matters a great deal. If your projected income for a given year is $106,000 as a single filer (just under the $109,000 threshold), a $4,000 decision — whether that’s an extra IRA withdrawal, a Roth conversion, selling appreciated stock, or taking a part-time consulting payment — can trigger $1,148 in additional Medicare premiums two years later. The math favors staying aware of where you are relative to each IRMAA bracket cutoff.

Qualified Charitable Distributions — A Unique Tool

Once you’re 70½, the IRS allows you to make a Qualified Charitable Distribution (QCD) directly from your IRA to a qualifying charity — up to $108,000 per year in 2026. A QCD counts toward your RMD for the year but does not count as taxable income. For retirees who are charitably inclined and facing large RMDs, QCDs can be an effective way to satisfy the IRS requirement without inflating your MAGI. This is one of the few strategies that directly reduces the income figure used for IRMAA calculations.

Delaying Social Security to Reduce Early-Retirement Income

Delaying Social Security benefits until age 70 increases your monthly benefit by 8% for each year past full retirement age. But there’s a secondary effect relevant here: the years when you receive no Social Security benefits are years when your MAGI is lower, giving you more room for Roth conversions, IRA withdrawals at lower rates, and staying under IRMAA thresholds. Whether this trade makes sense depends on your health, your other income, and your life expectancy projections. It’s a complex calculation that your financial advisor should model.

The Question We Hear Most: “Do I Need a U.S. Tax Accountant as an Expat?”

Yes. This is not a hedge. U.S. citizens are taxed on worldwide income regardless of where they live. Moving to Panama does not change your obligation to file a U.S. federal tax return. What it may do is open up certain Foreign Earned Income Exclusions and Foreign Tax Credits — but those apply to earned income, not to IRA distributions and Social Security, which are the primary retirement income sources we’re discussing in this guide. Pension income, IRA distributions, and Social Security are generally not excludable under the Foreign Earned Income Exclusion.

The interplay between Panama’s territorial tax system, your U.S. income obligations, the IRMAA calculation, and any applicable tax treaty (the U.S. does not currently have a comprehensive tax treaty with Panama) is genuinely complex. A qualified CPA who specializes in expat taxation is not a luxury — it’s a practical necessity for managing these correctly.

A Summary: What to Take Away From All of This

This is a genuinely complicated topic, and we’ve covered a lot of ground. Here are the five things we most want you to remember as you plan your Panama retirement:

1. Your pre-tax account balance is not your spendable amount. Federal income taxes on withdrawals will reduce it, likely by 10%–24% over time depending on your bracket. The higher your account balance and the more income you have from other sources, the higher that percentage may be.
2. RMDs are mandatory starting at 73 (or 75 if born after 1959), and they grow as a percentage of your balance over time. At 73 you’re withdrawing about 3.77% per year. By 85, that climbs to over 6%. You cannot opt out — missing the withdrawal triggers a 25% penalty on the amount not taken.
3. RMDs land on top of Social Security and other income. That combined income figure determines your tax bracket and whether Medicare surcharges apply. Stacking these income sources without planning can push you into brackets and IRMAA tiers you didn’t anticipate.
4. Medicare IRMAA surcharges are based on income from two years ago — and they can add $1,148 to nearly $14,000 per year per couple in Medicare costs beyond the standard premium. A large IRA that generates large RMDs can trigger these surcharges indefinitely.
5. There are planning strategies that can reduce this burden meaningfully — Roth conversions, QCDs, careful IRMAA threshold management, strategic Social Security timing — but these require professional guidance applied to your specific numbers, not a general overview like this one.

We’re doing our own version of this planning right now, and we’ll be honest: the spreadsheets are humbling. The $800,000 number looks very different after you account for what it actually generates in spendable, after-tax, after-Medicare-surcharge income. That recalibration is not a reason to panic — it’s a reason to plan carefully, get professional advice, and go into retirement with your eyes open.

If you’re reading this on the road to Panama, that planning window is still open. Use it.