A retiree sitting on $4.6 million in assets and collecting a $9,500 monthly pension should have an easy time gifting $125,000 to his kids. He doesn’t, and the reason applies to millions of Americans who spent decades doing exactly what they were told: save everything in a 401(k).
On a recent Clark Howard Podcast episode, a caller named John laid out his situation. He wanted to give his children $125,000 for home down payments but had almost no accessible cash. Only $50,000 sat in a high-yield savings account and $25,000 in a Roth IRA. Everything else was locked inside traditional retirement accounts. His question: is there a way to avoid the tax hit on a large withdrawal?
Howard’s answer was correct, but unpacking the full mechanics helps you apply the same thinking to your own balance sheet.
Howard Gets the Diagnosis Right
Howard first corrected a terminology slip: “He said FICA there. It’s not. He probably just means federal taxes. Not FICA, which would be your wage taxes, your Social Security taxes on your wages.” That distinction matters. FICA taxes apply to earned income, not retirement withdrawals. What John actually faces is ordinary income tax on every dollar pulled from a traditional IRA or 401(k).
Howard’s core advice: “Watch your tax bracket buckets. If you find yourself with $100,000 worth of room before you get to the next bucket, then it’s probably an okay time to be gifting.” He also recommended spreading the gifting over five years rather than three, and warned against jumping “from 24% all the way to 32%.”
The bracket management approach is the right framework. The problem is that John’s pension income likely makes the math tighter than it first appears.
The Pension Complicates Everything
John’s $9,500 monthly pension represents substantial annual income before any retirement account withdrawals. For a married couple filing jointly, the 2026 tax brackets place the 24% rate on income from $206,701 to $394,600, with 32% kicking in above $394,601. Depending on deductions and filing status, the pension alone could place them well inside the 24% bracket, leaving limited room before a large lump-sum withdrawal triggers the 32% rate.
Spreading a large withdrawal over multiple years keeps each annual distribution within the existing bracket rather than pushing a portion into a higher rate. The tax cost of impatience here is real.
The Gift Tax Angle John May Be Missing
There is a separate layer worth understanding that could reduce John’s tax burden significantly. The annual gift tax exclusion allows married couples to combine their individual exclusions, meaning John and his spouse could transfer up to $76,000 across two children each year with no filing requirement at all. Amounts above that threshold do not trigger immediate taxes. They simply require a gift tax return and draw down the lifetime exemption, making it a paperwork event rather than a tax event for most families. The real cost John faces is not the gift tax rules but the income tax on the withdrawal itself.
Who This Strategy Fits and Who It Doesn’t
Howard’s bracket-management approach works well for retirees with predictable, moderate income who have enough years ahead to spread large distributions. A 65-year-old with a pension covering basic expenses and a decade before required minimum distributions (RMDs) force larger withdrawals has real flexibility to time gifting strategically.
The approach becomes more constrained for retirees already near the top of their current bracket from pension and Social Security combined, or approaching age 73 when RMDs begin. Once RMDs kick in, the IRS dictates a minimum withdrawal each year regardless of tax consequences. A retiree who waits too long may find RMDs have already consumed most available bracket room, leaving no clean window for tax-efficient distributions.
John’s $350,000 remaining mortgage adds another wrinkle. He mentioned waiting to pay it off until he’s out of the 35% bracket. That’s a reasonable instinct, but it’s worth modeling whether the mortgage interest rate exceeds what the retirement account earns after taxes. With the 10-year Treasury currently yielding 4.26%, the opportunity cost calculation is less obvious than it was in a zero-rate environment.
Putting This Into Practice
Start by calculating your current taxable income from all predictable sources: pension, Social Security, rental income, and any other fixed payments. Then check how much room remains before the next bracket threshold. That gap is your annual gifting budget from retirement accounts if you want to stay within your current rate.
If you have a Roth IRA, as John does, qualified distributions are tax-free and don’t count toward taxable income. His $25,000 Roth balance is small relative to the goal. Qualified Roth distributions are tax-free and do not count toward taxable income, which is why financial advisors often discuss sequencing account withdrawals with a tax professional.
Howard’s recommendation to work with “a CPA or your CPA on this in coordination with a financial advisor” is the right call for a situation this complex. The bracket-spreading strategy is the correct framework, but execution requires knowing exact numbers including deductions, Social Security taxation thresholds, and RMD timelines that only a full tax projection can reveal.
John’s core constraint is a lack of flexibility outside his retirement accounts. Decades of pre-tax saving built a large balance but left almost nothing accessible without a tax event. The lesson for anyone still accumulating: build after-tax savings alongside pre-tax accounts so a large need does not force a choice between a tax bill and a delay.
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