He Gives His Grandchildren $30,000 From His 401(k). The Gift Doesn’t Tax Them, but His Withdrawal Could Add $3,950 to His Own Bill
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Bloomberg reports that grandparents increasingly help younger family members with everyday expenses. Take a hypothetical single 64-year-old with $40,000 in annual income before deductions who wants to give his grandchildren $30,000 from his traditional 401(k). His grandchildren owe nothing on the money. He pays the tax.
Why the Grandchildren Owe Nothing While He Owes Plenty
Under IRS rules, money received as a genuine gift generally isn’t taxable income to the recipient. His grandchildren can receive the cash without owing federal income tax on the gift itself, regardless of its size.
The withdrawal follows different rules. Every pre-tax dollar that leaves a traditional 401(k) counts as ordinary income in the year it comes out, the same as a paycheck. At 64 he is past the age when the early withdrawal penalty applies, so he avoids that. The full income tax still applies.
How a $30,000 Withdrawal Adds $3,950 to His 2026 Tax Bill
For a single filer in 2026, the standard deduction is $16,100.
The 12% rate applies to income over $12,400, and 22% applies to income over $50,400.
| Item | Without Gift | With $30,000 Withdrawal |
|---|---|---|
| Total income | $40,000 | $70,000 |
| Taxable income | $23,900 | $53,900 |
| Federal income tax | $2,620 | $6,570 |
Before the gift, all of his taxable income falls in the 10% and 12% brackets. After the withdrawal, the top $3,500 moves into the 22% bracket.
The gap between the two tax bills is $3,950, or about 13% of the gift.
Most of the withdrawal is taxed at 12%. Because he now sits in a higher bracket, any further dollar he withdraws costs him 22% in federal tax.
Medicare isn’t likely to be a problem in this example. Under its two-year income lookback, his 2026 income will generally determine whether he pays higher Part B premiums at 66 in 2028.
His $70,000 income is well below the $109,000 threshold used for single filers in 2026. A larger withdrawal could trigger a surcharge, although the thresholds and premiums for 2028 haven’t been announced. At 2026 rates, the first surcharge raises Part B premiums from about $203 to $284 a month.
Bracket creep and the Income-Related Monthly Adjustment Amount (IRMAA) surcharges are two of several subtle drains on retirement accounts. We mapped out nine of them, including the ones most retirees never see coming, which you can read here: The Retiree’s Tax Trap Map.
Gift Tax Rules Work Separately From His Income Tax
Gift tax rules are separate from income tax. For 2026, the annual gift exclusion is $19,000 per recipient. If he splits the $30,000 between two grandchildren, each gift stays under the exclusion, so he does not have to file a gift tax return.
If he gives the full $30,000 to one grandchild, he has to file Form 709 to report the amount above the exclusion. He still pays no gift tax. The excess is subtracted from his lifetime exemption, which is tied to the $15,000,000 basic exclusion amount for 2026.
When One Gift Becomes an Ongoing Expense
The bigger question is whether this $30,000 gift will be his last. Bloomberg reports that among parents expecting financial help from older relatives, 47% anticipate cash for everyday necessities.
Groceries, childcare and other monthly bills don’t disappear after one payment. If his grandchildren need help again next year, another 401(k) withdrawal could mean another tax bill. And every dollar he gives away is money he won’t have available for his own retirement.
Before writing the check, he needs to decide whether he’s making a one-time gift or taking on an expense that could follow him into retirement.
Gifting From Savings Saves Him $3,950
If he has $30,000 sitting in a savings account or money market fund, giving that cash adds nothing to his taxable income. He keeps the $3,950, and his 401(k) keeps growing tax-deferred.
The next best source is an ordinary brokerage account. He pays tax only on the gain when selling shares, and gains on shares held longer than a year get lower long-term rates. Ranking the options, cash comes first, a brokerage account second, and the 401(k) last.
Run These Numbers Before Writing the Check
- Gross up the withdrawal. If the tax has to come out of the 401(k) too, he needs to withdraw about $35,064 to have $30,000 left after federal tax. The extra $5,064 falls in the 22% bracket, so the cost grows on itself. Any required withholding could leave him with less cash initially.
- Plan around the 20% withholding. When a 401(k) pays an eligible rollover distribution directly to him, the plan generally must withhold 20% for federal income taxes. A $30,000 withdrawal would leave him with a $24,000 check.
- The $6,000 withheld exceeds the $3,950 in additional federal tax by $2,050. That excess could increase his refund when he files in 2027, depending on his other income and tax payments.
- Split the withdrawal between two tax years. He could take part of the money in December and the rest in January. If his other income stays similar, that could keep more of the money in the 12% bracket. The annual gift exclusion also resets each January. State income tax comes on top of the federal bill, so check his state’s rate before he acts.
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Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
