-
A retiree with $4.6 million in assets and a monthly pension of $9,500 can’t easily gift $125,000 to his children because nearly everything is locked up in tax-deferred 401(k)s and traditional IRAs, requiring a big income tax hit or strategic withdrawal timing across multiple years to avoid jumping into a higher tax bracket.
-
Solutions include calculating the headroom within your current tax bracket, spreading withdrawals over the years, using tax-free Roth distributions first, and consulting with a CPA to reconcile pension income and withdrawal timing before beginning required minimum distributions at age 73.
-
If you focus on picking the right stocks and ETFs, you may be missing out on the bigger picture: retirement income. That’s exactly what The Definitive Guide to Retirement Income aims to solve, and it’s now free. Read more here
A retiree with $4.6 million in assets and a monthly pension of $9,500 should easily be able to gift $125,000 to his children. He didn’t, and the reason applies to millions of Americans who have spent decades doing exactly what they were told: save everything in a 401(k).
On a recent episode of the Clark Howard Podcast, a caller named John described his situation. He wanted to give his children $125,000 for a down payment but had little cash. Just $50,000 in the high-yield savings account and $25,000 in the Roth IRA. Everything else is locked into traditional retirement accounts. His question: Is there a way to avoid the tax implications of large withdrawals?
Howard’s answer is correct, but unpacking the full mechanism can help you apply the same idea to your own balance sheet.
Have you read New Report Changing Retirement Planning? Americans are answering three questions as many realize they can retire earlier Better than expected.
Howard first corrected a terminological error: “He said FICA there. Not really. He probably just meant federal taxes. Instead of FICA, FICA is your payroll tax, your Social Security tax on your wages.” That distinction is important. FICA taxes apply to earned income, not retirement benefits. John effectively faces ordinary income taxes on every dollar withdrawn from a traditional IRA or 401(k).
Howard’s core advice: “Pay attention to your tax bracket. If you find you have $100,000 worth of room before you move into the next tax bracket, now might be a good time to give a gift.” He also recommends spreading gifts over five years rather than three, and warns against “going from 24% all the way to 32%.”
The scaffolding management approach is the right framework. The problem is that John’s pension income may make the calculation more stringent than it initially appears.
John’s monthly pension of $9,500 represents a substantial annual income before retirement account withdrawals. For married couples filing jointly, the 2026 tax brackets set the tax rate at 24% for incomes between $206,701 and $394,600 and 32% for incomes above $394,601. Depending on deductions and claims, superannuation alone could put them in the 24% band, leaving limited headroom before large lump sum withdrawals trigger the 32% tax rate.
Spreading large withdrawals over many years keeps each annual distribution within its existing range rather than pushing one portion into a higher ratio. The tax costs of impatience are real.
There is a separate layer worth understanding that can significantly reduce John’s tax liability. The annual gift tax exemption allows married couples to combine their personal exemptions, meaning John and his spouse can transfer up to $76,000 per year to their two children without filing a petition. Amounts above this threshold do not immediately trigger taxes. They only need to file a gift tax return and withdraw the lifetime exemption, which for most families is a paperwork exercise rather than a tax event. The real cost John faces is not the gift tax rules but the income tax on the withdrawal itself.
Howard’s graduated management approach is ideal for retirees with predictable, moderate incomes who have ample time to take large distributions. A 65-year-old with a pension that covers basic expenses and a decade before required minimum distributions (RMDs) force larger withdrawals has real flexibility to strategically time his giving.
This approach becomes more limited for retirees whose pension and Social Security benefits are already near their current maximum levels, or who are approaching age 73 when RMDs begin. Once an RMD is in effect, the IRS sets minimum withdrawals each year, regardless of tax consequences. Retirees who wait too long may find that the RMD has consumed most of the available bracket space, leaving no clean window for tax-efficient distributions.
John still has $350,000 left on his mortgage, which adds another layer of difficulty. He mentioned that he wouldn’t be able to pay it off until he was out of the 35% range. This is a reasonable intuition, but it’s worth modeling whether mortgage rates exceed after-tax income from retirement accounts. The current 10-year Treasury bond yield is 4.26%, and the opportunity cost calculation is not as obvious as in a zero interest rate environment.
Start by calculating current taxable income from all predictable sources: pensions, Social Security, rental income and any other fixed payments. Then check how much space is left before the next bracket threshold. If you want to stay at current levels, that gap is your annual gift budget for your retirement account.
If you have a Roth IRA like John, qualified distributions are tax-free and are not included in taxable income. His $25,000 Roth balance is small relative to his goal. Qualified Roth distributions are tax-free and do not count against taxable income, which is why financial advisors often discuss the order of account withdrawals with a tax professional.
Howard recommends working with a “CPA or your CPA in coordination with a financial advisor” is the right choice for this complex situation. A bracket-expanding strategy is the right framework, but execution requires knowing the exact numbers, including deductions, Social Security tax thresholds and RMD schedules, that only a complete tax forecast can reveal.
John’s core limitation is his lack of flexibility outside of his retirement accounts. Decades of pre-tax savings build up a huge balance, but almost nothing is gained without a tax event. Here’s a lesson for those who are still accumulating money: Build after-tax savings alongside pre-tax accounts so that huge needs don’t force people to choose between paying taxes and deferring.
You might think retirement is all about picking the best stocks or ETFs and saving as much as possible, but you’d be wrong. In the wake of new retirement income reports, wealthy Americans are rethinking their plans and realizing that even modest investment portfolios can become significant cash machines.
Many people even know they can retire earlier Better than expected.
If you are considering retirement or know someone who is, please take 5 minutes to learn more here.
