A New Option for Retirement Savers
Starting December 29, 2025, a significant change under the SECURE 2.0 Act now allows retirement savers under age 59½ to withdraw funds from their 401(k)s and other qualified retirement plans without paying the typical 10% early withdrawal penalty—if the money is used to pay long-term care insurance premiums.
This provision addresses a growing concern among Americans: how to pay for long-term care, which Medicare generally does not cover. According to a 2020 estimate from the U.S. Department of Health & Human Services, if you reach age 65, you have about a 70% chance of needing some form of long-term care services and support during your lifetime.
How the New Rule Works
Withdrawal Limits
The rule allows penalty-free withdrawals up to $2,600 per year for 2026, with this amount indexed for inflation in future years. However, there's an important restriction: you cannot withdraw more than 10% of your account balance, regardless of your actual premium costs.
Eligible Accounts
The provision applies to qualified defined contribution plans, including:
- 401(k) plans
- 401(a) plans
- 403(a) and 403(b) plans
- 457(b) governmental plans
Important note: While some financial industry summaries suggest IRAs may also qualify, savers should not assume IRAs are eligible until the IRS issues final guidance clarifying the details.
Tax Treatment
It's essential to understand that while the 10% early withdrawal penalty is waived, the distribution is still taxable as ordinary income. You'll owe federal and potentially state income taxes on the amount withdrawn, just as you would with any other retirement account distribution.
Insurance Requirements
Not just any insurance policy qualifies. The premiums must be for "certified" long-term care coverage, specifically:
- A qualified long-term care insurance contract under IRC Section 7702B(b)
- A life insurance or annuity contract with a rider covering qualified long-term care services
Plan Adoption: Check With Your Employer
Just because this provision exists doesn't mean your employer's plan offers it. According to the Plan Sponsor Council of America, most retirement plans (82%) have not yet added this feature. Only 1.5% have implemented it, with another 1.5% adding it this year and 25% considering adoption.
If you're interested in using this option, contact your plan administrator to find out whether your employer has adopted this provision or plans to do so.
Is This Right for You?
While penalty-free access to retirement funds for long-term care premiums sounds appealing, financial experts recommend carefully weighing the decision. Consider these factors:
Potential benefits:
- Access to funds before age 59½ without penalty
- Ability to secure long-term care coverage earlier in life when premiums are typically lower
- Protection against a significant financial risk that Medicare doesn't cover
Important considerations:
- Withdrawals reduce your retirement savings and their future growth potential
- You'll still owe income taxes on the distribution
- Younger savers may benefit more from keeping funds invested
- Alternative sources of premium funding may be available
The Takeaway
The SECURE 2.0 long-term care provision offers retirement savers a new tool for addressing a real financial concern. However, like any financial decision, it requires careful consideration of your individual circumstances, including your current retirement savings, insurance needs, and overall financial plan.
Before making any withdrawals, consider consulting with a financial advisor who can help you evaluate whether this option aligns with your long-term retirement goals. The decision to tap retirement funds—even penalty-free—should be weighed against the potential cost of reduced savings growth over time.
Sources: CNBC, AARP, LTC News, Plan Sponsor Council of America