Retired Couple Will Pull $120,000 From an IRA for Their Son’s Down Payment and Hand the IRS $34,000 They Won’t Have To

Suppose a retired couple wants to give their son $120,000 toward his first home. Most savings sit in a traditional IRA, so the plan is simple: withdraw the full amount this year and write one check. Stacked on pension and Social Security income, that single withdrawal could generate an estimated federal tax bill near $34,000. A large share comes from timing, and timing is fixable.

Plenty of retirees face this exact question. On a March 2026 episode of the Clark Howard podcast, a caller named John from Illinois with $4.6 million in assets and a pension of $9,500/month asked how to gift $125,000/year to his three children for home purchases without mishandling the tax on retirement account withdrawals.

Why Adult Children Need Bigger Down Payments Now

Housing costs explain the pressure. The Case-Shiller national home price index hit 336.7, its highest reading of the past year. The 10-year Treasury yield, a benchmark that heavily influences mortgage pricing, rose to 5%, up from 4% in February. Every dollar of down payment reduces the balance the son finances at those rates, so the gift has real value. The only question is how much the parents overpay to fund it.

Tax Brackets Decide Who Keeps the Money

Every dollar pulled from a traditional IRA counts as ordinary income. For 2026, married couples filing jointly get a $32,200 standard deduction. The 12% bracket runs up to $100,800 of taxable income, the 22% bracket up to $211,400, and 32% begins above $403,550.

A couple whose pension and Social Security already fill much of the 12% bracket will see a lump-sum withdrawal land mostly at 22% and 24%. Spread across three or four years, the same money can be taxed at 12% and 22%. The gap between those rates, applied to tens of thousands of dollars, is where the avoidable part of that tax bill lives.

Two hidden costs make the lump sum worse. A one-year income spike can pull more Social Security benefits into taxable income, and Medicare uses income from two years earlier to set Part B and Part D surcharges. One big withdrawal can raise their health premiums in 2028 (we mapped out this and eight other IRS rules that quietly drain retirement accounts in a free guide).

Gift Tax Is Paperwork for This Family

Many parents assume the gift itself triggers a tax. For 2026, the annual gift exclusion is $19,000 per recipient, and each spouse gets a separate exclusion. Anything above that goes on Form 709 and reduces the lifetime exemption, which tracks the estate basic exclusion amount of $15,000,000. Unless their estate approaches that figure, the gift itself goes tax-free and income tax on the IRA withdrawal is the cost that matters.

Two Funding Routes That Cut the IRS Bill

Path One: Split the IRA Withdrawals Across Tax Years

The simplest fix is pulling part of the money in December 2026 and the rest in January 2027. That puts the income in two tax years weeks apart, which may fit the son’s closing timeline. If the parents hold cash reserves, they can front the down payment as a documented loan, then refill reserves with smaller IRA withdrawals over several years, each sized to stay inside the 22% bracket.

Path Two: Use Taxable or Roth Money First

Selling investments in a taxable brokerage account taxes only the gain, usually at long-term capital gains rates below ordinary rates. Qualified Roth withdrawals are tax-free. Either source funds the gift far more cheaply, leaving IRA money for controlled future withdrawals.

One catch needs attention. As the Clark Howard program explained to a listener in June 2026, heirs get a step-up in basis on taxable brokerage assets but “There’s no step up in basis for IRA money or Roth money“. Spending highly appreciated taxable shares now gives up a future step-up for the son. Low-gain holdings and cash are the ideal sources.

For most couples, the single-year lump sum is the worst of the three options. Path one wins when the IRA holds most of the money. Path two wins when low-gain taxable assets or Roth money exist.

What to Settle Before the Closing Date

First, project 2026 taxable income before withdrawing anything. Know exactly how much IRA money fits under the $211,400 line this year and how much can wait until January.

Second, avoid handing over the entire withdrawal with nothing set aside. Parents who give away every dollar often face the tax bill next April, and the extra IRA withdrawal needed to pay it pushes their income even higher. If a single-year withdrawal would also cross a Medicare surcharge tier, a CPA’s multi-year projection usually costs far less than the premiums and taxes it prevents.

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