I’m 70, have $1M in my 401(k) and I want to give my son his $200,000 inheritance now for his first home — but can I truly afford it?

Because 401(k) distributions are taxed as ordinary income, taking a withdrawal of that size will push you into a higher tax bracket, increase the taxable portion of Social Security and even affect Medicare premiums.

And that’s before you consider the long-term impact on your own financial future. At 70, you may still have decades ahead of you and helping your children today shouldn’t come at the cost of becoming a financial burden to them later.

The good news on taxes

The 2025 annual gift exclusion is $19,000 per recipient, so your first $19,000 is tax-free in the gift–tax sense. You’ll still need to file a Form 709 to report the $181,000 excess. That uses part of your lifetime gift exemption of $13.99 million, but you won’t incur gift taxes until you exceed $13.99 million total.

The bad news on taxes

Unfortunately, when you take assets out of a 401(k), the distribution is taxed as regular income and in 2025 if you’re filing as an individual, taking out $200,000 will likely put your federal tax at 35%. (Depending on where you live, you may also have to pay state and local income tax.)

Roger Wolner, a financial advisor in Arlington Heights, Illinois, says the key thing is to “make sure you know where the money to pay the taxes on the 401(k) distribution will come from. If you have to pay taxes at a combined state and federal rate of 40% from your distribution to fund the $200,000 gift, the money you will have to take out will be closer to $280,000. Suddenly the million dollars you saved for retirement is just $720,000.”

For perspective, in 2025 the new “magic number” Americans think they’ll need saved for retirement is $1.26 million — so depending on your unique circumstances (such as your state of residence, the age you retired and how much you spend), $720,000 may not be enough to see you through your retirement comfortably.

Especially as making a large withdrawal from a traditional 401(k) can trigger the Income-Related Monthly Adjustment Amount (IRMAA), a Medicare surcharge that raises premiums for Part B and Part D. IRMAA is based on your modified adjusted gross income (MAGI) from two years prior, so a large withdrawal in 2025 could raise your 2027 premiums. For example, in 2025, a single filer with MAGI over $206,000 would pay up to $591.90 monthly for Part B — more than double the base rate — and additional premiums for Part D. A $280,000 401(k) distribution, taxed as ordinary income, could push you into the highest IRMAA tier, costing thousands of dollars in extra premiums annually. This trigger would raise your monthly expenditures and burn through your savings faster.

If you’re still determined to give, here’s how to do it

Stagger the withdrawals

Avoid a single $200,000 lump sum. Spreading it over two years — say something as simple as gifting $100,000 this December and $100,000 in January — could keep you in a lower tax bracket and ease the blow to your adjusted gross income.

Cover capital costs directly

If part of the gift is for education, medical needs, inspection fees or closing costs, you could pay those bills directly. These are exempt from gift tax and don’t count against your lifetime exemption. If you have extra cash, you could also use that to pay the taxes on a 401(k) withdrawal.

Coordinate with your adult child

Your son might also consider taking money in separate years to avoid his own tax spikes. Collaborating on timing could benefit both your tax situations.

Consider a financial advisor or CPA

Your circumstances are unique. A tax planner can help optimize timing, withdrawal amounts and use of tools like Qualified Charitable Distributions to offset taxable income or fund life insurance trusts.

In any case, calculating the true cost of inheritance and gifting strategically with these considerations in mind can maximize both the amounts your son receives and you yourself get to keep.