Imagine hitting your mid-50s, finally feeling like your retirement nest egg is on solid ground, and then getting hit with the reality of what long-term care might cost down the road. It’s one of those topics most of us prefer to push to the back of our minds, but ignoring it doesn’t make the numbers any smaller. The truth is, many people will need some form of help with daily activities as they age—and paying for it can derail even the best-laid retirement plans.
That’s where a brand-new option comes into play, one that just became available at the end of 2025. Thanks to changes tucked into the Secure 2.0 legislation from a few years back, you can now tap your 401(k) for a specific purpose without facing that dreaded early withdrawal penalty. It’s aimed squarely at helping cover long-term care insurance premiums. Sounds helpful, right? But as with most financial rules, there are catches worth understanding before you get too excited.
A Closer Look at the New Penalty-Free Withdrawal Rule
This provision isn’t mandatory for employers, so don’t assume your plan automatically includes it. Many companies are still figuring out whether they’ll amend their plan documents to allow it. In my experience working with retirement strategies, these kinds of updates often roll out gradually—some plans jump on board quickly, others take months or even years.
When it’s available, the basics are straightforward. If you’re under 59½, you can withdraw money each year specifically to pay qualified long-term care insurance premiums without owing the usual 10% penalty. The cap starts at $2,600 for 2026 and will adjust upward with inflation over time. There’s also a safeguard: you can’t take out more than 10% of your vested account balance in a single year.
Of course, nothing in retirement planning is entirely free. The amount you withdraw still counts as taxable income, so you’ll owe ordinary income taxes on it. Depending on your bracket, that could eat into a good chunk of what you’re trying to save on insurance costs.
Why Long-Term Care Planning Matters More Than Ever
Let’s be honest—most of us would rather think about vacation plans than nursing home bills. Yet the statistics are hard to ignore. Once you reach age 65, there’s roughly a 70% chance you’ll need some type of long-term care services. Women, on average, require assistance for longer than men, often stretching past three years.
And the costs? They’re climbing faster than many retirees’ fixed incomes can handle. A home health aide now runs a median of nearly $78,000 annually in many areas. Nursing home care easily tops six figures per year for a private room. These aren’t one-time expenses either—they can drag on for years, quietly draining savings that were meant for travel, family gifts, or simply enjoying life.
Medicare, which most people rely on after 65, offers almost no coverage for custodial care—the everyday help with bathing, dressing, or eating that defines long-term care. That leaves families to either self-fund, lean on Medicaid (after spending down assets), or purchase insurance ahead of time.
- About one-third of 65-year-olds may never need paid long-term care.
- Another 20% could require it for more than five years.
- The rest fall somewhere in between, making planning feel like a gamble.
Breaking Down Long-Term Care Insurance Options
When people decide insurance makes sense, they generally face two main paths: traditional policies or hybrid products. Traditional long-term care insurance is exactly what it sounds like—coverage that pays out only if you need care. If you stay healthy and never file a claim, all those premiums essentially vanish.
That “use it or lose it” aspect turns a lot of people off. I’ve spoken with plenty of clients who hate the idea of paying thousands yearly for something they might never use. Premiums aren’t cheap either, especially if you want decent inflation protection built in.
Many buyers prefer the peace of mind that comes with knowing the money isn’t completely gone if care is never needed.
Enter hybrid policies. These typically combine life insurance with a long-term care rider. You get some death benefit that passes to heirs, plus access to funds for care if needed. The coverage for care expenses might not be as generous as a standalone policy, but there’s less risk of “wasted” premiums.
Pricing varies widely based on age, health, coverage amount, and inflation adjustments. For someone purchasing at 55:
- A traditional policy with moderate benefits and 3% inflation growth might run $2,000–$4,000 annually.
- Opting for stronger 5% growth pushes premiums significantly higher.
- Women generally pay more due to longer average lifespans.
- Hybrid versions often fall somewhere in between in cost.
Insurers can also raise rates on traditional policies over time, adding another layer of uncertainty. That’s why shopping carefully and locking in while relatively young and healthy usually pays off.
The Real Limitations of the New 401(k) Provision
Even if your employer adopts the rule, several restrictions keep it from being a complete game-changer. First, the dollar cap—starting at $2,600—might not cover full premiums for robust policies, especially for couples or those wanting strong inflation protection.
Second, the 10% of balance limit protects smaller accounts but also constrains larger withdrawals when they’re most needed. Someone with a modest 401(k) might find the actual allowable amount falls well below the annual cap.
Third, taxes still apply. Withdrawing $2,600 could add hundreds in federal income tax alone, depending on your bracket. State taxes might pile on too. For higher earners, the tax bite could nearly offset the penalty savings.
Perhaps the biggest drawback is opportunity cost. Money pulled out early no longer grows tax-deferred. Over a decade or two, that compounding can make a meaningful difference in final retirement balances.
| Withdrawal Amount | Penalty Saved (10%) | Typical Tax Owed (22% bracket example) | Net Benefit |
| $2,600 | $260 | $572 | Loss of ~$312 plus lost growth |
| $1,500 | $150 | $330 | Loss of ~$180 plus lost growth |
There’s also lingering uncertainty around hybrid policies. Regulators haven’t fully clarified whether the entire premium qualifies or only the portion directly attributable to long-term care coverage. Until guidance arrives, plan administrators may take conservative approaches.
Does It Ever Make Sense to Use This Rule?
For some people, absolutely. If you’re in a lower tax bracket now than expected in retirement, paying tax today to secure coverage could be strategic. Or if cash flow is tight and premiums would otherwise go unpaid, keeping a policy in force matters more than maximizing every retirement dollar.
But for many middle- and higher-income households, financial planners often lean toward paying premiums from current income or other taxable accounts instead. That preserves tax-advantaged growth inside retirement plans where it can compound longest.
Another angle I’ve seen work well: using the rule selectively in years when premiums spike or other expenses crowd the budget. It’s not an all-or-nothing choice—treat it as an emergency valve rather than a primary funding strategy.
- Check whether your specific 401(k) plan has adopted the provision.
- Compare your current tax bracket to projected retirement brackets.
- Model the long-term impact of reduced compounding.
- Explore whether other assets could cover premiums instead.
- Consult a planner familiar with both retirement distributions and insurance.
Broader Strategies for Long-Term Care Funding
This new withdrawal option is just one tool in a much larger toolbox. Savvy planners often layer multiple approaches:
Self-insuring remains viable for those with substantial assets. Health savings accounts (HSAs) offer another tax-advantaged way to set money aside specifically for medical and care expenses—triple tax benefits make them hard to beat when available.
Some people downsize homes or purchase annuities with long-term care riders. Others prioritize building emergency funds outside retirement accounts to handle premium payments flexibly.
In my view, the most overlooked strategy is simply starting conversations early. Talking with family about preferences, touring facilities, and running realistic cost projections removes much of the fear—and often reveals that moderate planning goes a long way.
No single solution fits everyone. What matters is recognizing the risk exists and taking deliberate steps rather than hoping it won’t happen to you.
At the end of the day, this new 401(k) rule offers flexibility that didn’t exist before. It’s a nod to how expensive long-term care has become and how unprepared many Americans remain. Whether you ultimately use it depends on your overall financial picture, health outlook, and comfort with various trade-offs.
The bigger win might be that it sparks more people to think seriously about long-term care planning in the first place. Because waiting until care is needed is almost always the most expensive option of all.
If you’re nearing retirement or helping aging parents navigate these choices, now’s a good time to review options. A little proactive planning today can preserve both financial security and peace of mind tomorrow.
