Updated September 2026 with the 2026 IRS figures.
The short answer is no, you can't gift money straight out of a 401(k). The account belongs to you, and the IRS only lets money leave it as a distribution, a loan, or an inheritance. What you can do is take a withdrawal, pay the income tax on it, and give your children what's left. Whether that's a smart move depends on your age, your tax bracket, and what you're trying to do for them.
Here's how each route works in 2026, with the numbers that apply this year.
The basic rule: withdraw first, then gift
Every dollar you pull from a traditional 401(k) counts as ordinary income in the year you take it. If you're in the 24% federal bracket and you withdraw $30,000 to give to your daughter, you'll owe roughly $7,200 in federal tax before state tax, so she'd receive about $22,800 if you gift the net amount.
If you're under 59½, add a 10% early-withdrawal penalty on top of the income tax unless you qualify for an exception. The common ones:
- The rule of 55. If you leave your job in or after the year you turn 55, you can take penalty-free withdrawals from that employer's 401(k). This doesn't apply to IRAs or to 401(k)s from earlier jobs.
- Substantially equal periodic payments (72(t)). A fixed withdrawal schedule for at least five years or until 59½, whichever is longer.
- Disability, certain medical costs, and a few hardship categories. Hardship withdrawals are limited to the amount of the hardship and are still taxed as income.
Once the money is out and the tax is paid, gifting it is simple. Your children never pay income tax on a gift.
The annual gift tax exclusion in 2026
In 2026 you can give $19,000 per recipient without filing a gift tax return. A married couple can give $38,000 to each child. If you have three kids and you're married, that's $114,000 a year, no paperwork.
Give more than $19,000 to one person and you file Form 709 to report the excess. You almost certainly won't owe gift tax, because the excess simply reduces your lifetime exemption, which is $15 million per person in 2026 ($30 million for a couple). The old sunset that would have cut the exemption roughly in half in 2026 was removed by the 2025 tax law, so the $15 million figure is now indexed for inflation going forward.
Required minimum distributions and gifting
If you're 73 or older (the RMD age under SECURE 2.0; it rises to 75 for people born in 1960 or later), you have to take a required minimum distribution from a traditional 401(k) every year. You'll pay income tax on it whether you need the money or not.
A lot of retirees use the RMD as their gifting budget. Take the distribution, pay the tax, and give the net to the kids within the annual exclusion. If your RMD is $25,000 and taxes take $5,500, the remaining $19,500 is close to the 2026 exclusion for one child, or splits cleanly between two.
One change worth knowing: since 2024, Roth 401(k)s no longer have RMDs during your lifetime. If part of your balance is Roth, that part can stay invested.
A worked example
Say you're 66, retired, married, in the 22% federal bracket, and you want to help your son with a $40,000 down payment.
- Withdraw $52,000 from the 401(k). No penalty, since you're past 59½.
- Federal tax at 22% is about $11,440. California would add its own tax, so plan for closer to $15,000 total.
- You're left with roughly $37,000 to $40,000.
- You and your spouse give $38,000 to your son in 2026. That's within the combined annual exclusion, so no Form 709.
If the gift needs to be larger, split it across December and January so it falls in two tax years, or file the 709 and let the excess count against the $15 million lifetime exemption. Either way the gift tax bill is zero; the only real cost is the income tax on the withdrawal.
Naming your children as beneficiaries instead
If the goal is to pass the account on rather than help now, a beneficiary designation is usually cheaper than a withdrawal. Your children inherit the 401(k) or roll it into an inherited IRA, and the money keeps growing tax-deferred.
The rules for non-spouse beneficiaries:
- Most adult children must empty the inherited account within 10 years of your death.
- Under the IRS regulations finalized in 2024 and effective in 2025, if you had already started RMDs, your children must also take annual distributions during those 10 years, not just a lump sum at the end.
- A minor child is an "eligible designated beneficiary" and can stretch withdrawals until age 21, after which the 10-year clock starts.
Check your beneficiary form after any marriage, divorce, or birth. The form controls, not your will.
Borrowing from the 401(k) to make a gift
Many plans allow a loan of up to $50,000 or 50% of your vested balance, whichever is less, repaid with interest over five years. The loan isn't taxed, so it can fund a gift without a tax hit today.
The catch: if you leave the employer or miss payments, the outstanding balance becomes a taxable distribution, plus the 10% penalty if you're under 59½. Borrowing from retirement savings to give money away is rarely worth that risk, but it exists.
Other ways to help that don't touch the 401(k)
- 529 plan superfunding. You can front-load five years of annual exclusions into a 529 in one year: $95,000 per child in 2026, or $190,000 from a couple. The money grows tax-free for education, and since 2024 up to $35,000 of leftover 529 money can roll into the child's Roth IRA.
- Rolling to an IRA first. An IRA gives you more control over withdrawal timing than most 401(k) plans and makes charitable distributions possible.
- Qualified charitable distributions. From age 70½, you can send up to $111,000 a year (the 2026 limit, up from $108,000 in 2025) directly from an IRA to charity. It doesn't help your kids directly, but it satisfies your RMD without adding to your taxable income, which can leave more room for gifts from other accounts.
- Paying tuition or medical bills directly. Amounts you pay straight to a school or medical provider for someone else don't count against the $19,000 exclusion at all.
What to do before you withdraw
- Confirm your age against the 59½ and 73 thresholds.
- Estimate the federal and state tax on the withdrawal at your marginal rate, and decide whether to gross it up.
- Check whether the gift fits under $19,000 per recipient (or $38,000 from a couple). If not, plan to file Form 709.
- Compare the cost against a beneficiary designation or a 529 contribution.
- Talk to a tax professional if the amount is large. State rules, Medicaid look-back periods, and your own retirement runway all matter more than the gift tax.
Frequently asked questions
Can I transfer my 401(k) directly to my child?
No. During your lifetime a 401(k) can only be transferred to a spouse in a divorce. Your child can only receive it as a beneficiary after your death.
How much can I gift from my 401(k) without paying taxes?
The withdrawal itself is always taxed as income. The gift is tax-free to your child up to $19,000 per recipient in 2026, and above that it reduces your $15 million lifetime exemption rather than triggering a tax.
Can I gift my 401(k) to my child without penalty?
Only if you're 59½ or older, or you qualify for an exception such as the rule of 55. Otherwise a 10% penalty applies to the withdrawal.
Can I leave my 401(k) to my kids?
Yes, by naming them on the plan's beneficiary form. They'll generally have 10 years to withdraw the money, with annual distributions required in most cases.
Is it better to gift from a 401(k) or a Roth IRA?
Roth withdrawals of contributions are tax-free at any age, and qualified Roth withdrawals of earnings are tax-free after 59½ and five years, so a Roth is usually the cheaper source for a gift. Traditional 401(k) money is taxed on the way out.
This article is for general information and isn't tax, legal, or investment advice. Figures are the 2026 federal amounts published by the IRS; state rules differ. Talk to a qualified professional about your own situation.
Logan Winn, MBA, writes about money, business, and running a company on AI agents. More at loganwinn.com.
