New for 2026: Using Your 401(k) to Pay for Long-Term Care Insurance

For years, one of the biggest obstacles to purchasing long-term care insurance has been finding the money to pay for premiums — especially during retirement when income is often fixed. With an effective date of December 29, 2025, a new provision in the SECURE Act 2.0 changes the equation. For the first time, Americans can withdraw funds from eligible employer-sponsored retirement plans like a 401(k) or 403(b) to pay for long-term care insurance premiums without paying the 10% early withdrawal penalty. The distribution is limited to the lowest of the LTC premium amount, 10% of the employee’s vested accrued benefit in the plan, or approximately $2,600 for 2026 (the $2,500 base limit indexed for inflation). Note that the withdrawal is still subject to ordinary income tax. This article explains how this new provision works, who qualifies, and whether it makes sense for your situation.

What Changed in Late 2025

The SECURE 2.0 Act of 2022 (officially the Setting Every Community Up for Retirement Enhancement Act) included dozens of provisions designed to improve retirement security for Americans. While many provisions took effect immediately or in 2024–2025, Section 334 was given a delayed effective date of December 29, 2025 — three years after the SECURE Act 2.0 was signed into law.

Section 334 creates a new exception to the 10% early withdrawal penalty that normally applies to retirement account distributions taken before age 59½. Under this provision, participants in eligible employer-sponsored retirement plans can now make penalty-free distributions to pay for premiums on qualified long-term care insurance contracts. The distribution amount is limited to the lowest of: (a) the LTC premium amount, (b) 10% of the employee’s vested accrued benefit in the plan, or (c) approximately $2,600 for 2026 (the $2,500 base limit indexed for inflation starting 2025). Important: these distributions are still included in gross income and subject to ordinary income tax — the provision eliminates only the 10% early withdrawal penalty.

This is significant because, until now, using retirement funds for LTC insurance premiums before age 59½ meant:

• Paying ordinary income tax on the withdrawal (potentially 12% to 37% depending on your tax bracket) — this still applies
• Paying a 10% early withdrawal penalty if under age 59½ — this is what Section 334 eliminates
• Increasing your adjusted gross income (AGI), which could trigger higher Medicare premiums (IRMAA) and reduce other tax benefits — this still applies, since the distribution is included in gross income

The new provision eliminates the 10% early withdrawal penalty on qualifying distributions — up to the applicable annual limit. The withdrawal remains subject to ordinary income tax and is still included in your AGI.

The SECURE Act 2.0 Provision in Detail

Here is a closer look at the specific language and mechanics of Section 334:

Key Parameters

The provision is designed as a penalty exception rather than an income exclusion or deduction. The withdrawal is still included in your gross income and reported on your tax return as taxable income. The key benefit is the elimination of the 10% early withdrawal penalty that would otherwise apply to distributions taken before age 59½. For individuals who are already 59½ or older and would not face the penalty anyway, the provision’s primary benefit may be limited; however, it does provide a clear, designated pathway for plan administrators to process LTC-related distributions.

Eligibility Rules

To take advantage of this provision, you must meet all of the following criteria:

1. You Have an Eligible Retirement Plan

The provision primarily applies to distributions from employer-sponsored plans:

• 401(k) plans — including traditional and Roth 401(k)
• 403(b) plans — used by public schools, nonprofits, and some government employees
• Governmental 457(b) plans — used by state and local government employees

Important: IRA eligibility (Traditional and Roth) is uncertain under the current statutory language and is awaiting further IRS guidance. The provision as written refers to distributions from employer-sponsored plans. Until the IRS issues clarifying regulations, do not assume IRAs are eligible.

Additionally, plan sponsors must amend their plan documents to allow for this new type of distribution. Adoption is optional, not mandatory. If your employer’s plan has not adopted the provision, you will not be able to take this type of distribution from that plan. Speak with your plan administrator or HR department to determine whether your plan has been amended.

2. The Insurance Policy Must Be “Qualified”

The premiums must be for a qualified long-term care insurance contract as defined under Internal Revenue Code Section 7702B. This includes most traditional standalone long-term care insurance policies sold in the United States. The policy must:

• Be guaranteed renewable
• Not provide for a cash surrender value
• Use benefits only for qualified long-term care services
• Meet specific consumer protection requirements

3. The Distribution Must Be Used for Premiums

The penalty-free treatment applies only to distributions used to pay for LTC insurance premiums. You cannot withdraw the funds and use them for other purposes while claiming the penalty exemption. The IRS is expected to require either a direct trustee-to-insurer payment or documentation (such as a premium receipt) showing the withdrawal was used for qualifying premiums.

How It Works: Step by Step

Here is a practical walkthrough of how to use this provision:

1. Purchase a qualified LTC insurance policy (or already have one in force). Work with a licensed agent to find a policy that meets your needs and budget.
2. Contact your retirement plan administrator and request a distribution for long-term care insurance premiums under SECURE Act 2.0 Section 334. Confirm that your plan has been amended to allow this type of distribution.
3. Arrange payment. Ideally, the plan will make a direct payment to your LTC insurance carrier. If your plan instead distributes the funds to you, retain documentation showing the funds were used for LTC premiums.
4. Report properly at tax time. The distribution will be reported on your tax return as taxable income, but exempt from the 10% early withdrawal penalty. Your plan administrator should issue a Form 1099-R with the appropriate distribution code indicating the penalty exception. You should also receive a statement from your LTC insurer confirming the premium payment.
5. Stay within the limit. Ensure your penalty-free LTC distributions do not exceed the applicable limit for the year (approximately $2,600 for 2026). The distribution is also limited to the lesser of your LTC premium amount and 10% of your vested accrued benefit in the plan. Any excess will be treated as a normal distribution subject to both income tax and the 10% early withdrawal penalty (if under age 59½).

Tax Implications

The tax benefits of this provision are straightforward but significant:

What You Save

The primary savings under Section 334 is the elimination of the 10% early withdrawal penalty for individuals under age 59½. If you withdraw $2,500 for LTC premiums:

The $250 annual penalty savings is most meaningful for early retirees under age 59½. For those already past 59½, the 10% penalty would not apply anyway, so the direct tax savings from this provision are minimal. Over 10 years of early retirement distributions, avoiding the penalty saves $2,500. The provision’s broader value lies in creating a clear, sanctioned distribution pathway for LTC premium payments from employer-sponsored retirement plans.

Impact on IRMAA

Because the distribution is included in gross income, it does increase your AGI. Medicare beneficiaries who are near an IRMAA income threshold should be aware that a $2,500 taxable distribution could push you into a higher IRMAA bracket, increasing your Part B and Part D premiums by hundreds or even thousands of dollars per year. The Section 334 provision does not provide an exclusion from income for IRMAA purposes — it only eliminates the 10% early withdrawal penalty.

Interaction with Existing LTC Tax Deduction

Under current tax law (IRC Section 213), you can already deduct qualified LTC insurance premiums as a medical expense — but only to the extent that your total medical expenses exceed 7.5% of your AGI and only up to age-based limits. For most people, this deduction provides little or no benefit because they do not itemize or cannot exceed the 7.5% threshold.

Unlike the medical expense deduction, the Section 334 provision does not reduce your taxable income — it only eliminates the 10% early withdrawal penalty. You may still be able to deduct LTC premiums as a medical expense under IRC Section 213 (subject to the 7.5% AGI threshold and age-based limits), even if you used a Section 334 penalty-free distribution to pay for them. Consult a tax advisor to determine whether you can combine both benefits for the same premium dollars.

Limitations to Know

While this provision is a welcome development, it has several important limitations:

1. The Distribution Cap Is Relatively Modest

The approximately $2,600 annual limit for 2026 (the $2,500 base indexed for inflation), while helpful, may not cover the full cost of LTC insurance for older applicants. Additionally, the distribution is further limited to 10% of the employee’s vested accrued benefit in the plan and the actual LTC premium amount — whichever is lowest. A 65-year-old couple could easily pay $5,000 to $8,000 per year in combined LTC premiums. The provision covers only a portion of that cost. However, the limit is per person — so a couple with two eligible plans could benefit from up to approximately $5,200 per year in penalty-free distributions.

2. Only Qualified Traditional LTC Policies

The provision applies to qualified long-term care insurance contracts under IRC Section 7702B. This means:

• Traditional standalone LTC policies — generally qualify
• Hybrid life insurance + LTC policies — only the portion allocated to the LTC rider may qualify (guidance pending)
• Short-term care policies — generally do not qualify
• Critical illness or hospital indemnity policies — do not qualify

3. Plan Adoption Is Required

Employer-sponsored plans (401(k), 403(b), 457(b)) must amend their plan documents to adopt the provision before participants can use it. This is optional, not mandatory for plan sponsors. If your employer’s plan has not adopted the provision, you will not be able to take this type of distribution. Because IRA eligibility is uncertain under the current statutory language, rolling funds to an IRA may not provide access to this benefit. Contact your plan administrator to determine whether your plan has been amended to allow Section 334 distributions.

4. Does Not Apply to Existing Care Expenses

This provision is for insurance premiums only — not for paying long-term care expenses directly. If you are already receiving long-term care and paying out of pocket, this provision does not help unless you also maintain an active LTC insurance policy with ongoing premiums.

5. IRA Eligibility Is Uncertain

Although some interpretations suggest IRAs (Traditional and Roth) may be eligible, the statutory language of Section 334 primarily references employer-sponsored plans. Until the IRS issues further guidance or regulations, IRA eligibility remains uncertain. If you are relying on an IRA for this provision, consult with a tax advisor and confirm with your IRA custodian before proceeding.

Who Benefits Most from This Provision?

The SECURE Act 2.0 LTC provision is most valuable for the following groups:

People with Large Retirement Plan Balances

If you have substantial savings in a 401(k) or similar employer-sponsored plan, this provision gives you a penalty-free way to access funds for long-term care protection before age 59½. Rather than facing a 10% penalty on top of income tax, you can redirect a portion of your balance toward protection against one of retirement’s biggest financial risks while avoiding the penalty. Keep in mind the distribution is still taxable as ordinary income.

Those Who Otherwise Would Not Buy LTC Insurance

Many people recognize they need long-term care protection but balk at the idea of paying premiums while also facing an early withdrawal penalty. The ability to access retirement funds penalty-free for LTC premiums reduces the total cost of the distribution — though the withdrawal is still subject to income tax. For early retirees, avoiding the 10% penalty effectively lowers the cost of accessing funds by that amount, which may be enough to tip the scales in favor of purchasing coverage.

People Near IRMAA Thresholds

If your income is near the thresholds for Medicare IRMAA surcharges, be aware that Section 334 distributions are included in gross income and will increase your AGI. This provision does not help with IRMAA avoidance. However, for those under 59½, the penalty savings can still make the distribution more cost-effective than it would have been without Section 334.

Early Retirees (Under 59½)

For people who have retired early and want to purchase LTC insurance but face the 10% early withdrawal penalty on retirement account distributions, this provision eliminates the penalty on the first $2,500. This is particularly meaningful for those in the 55–59 age range who may not have access to other penalty-free distribution methods.

Practical Example

Consider Sarah, age 58, a recently retired teacher in North Carolina with $350,000 in her 403(b) and a modest pension. She wants to purchase a standalone LTC policy with an annual premium of $2,200. Without Section 334, withdrawing $2,200 from her 403(b) would cost her approximately $484 in federal tax (22%), $99 in North Carolina tax (4.5%), and $220 in early withdrawal penalty (10%) — a total of $803 in taxes and penalties. With Section 334, she still owes the $484 in federal tax and $99 in state tax, but the $220 early withdrawal penalty is eliminated — saving her $220. Her total cost for the $2,200 distribution drops from $803 to $583. The provision does not make the withdrawal tax-free, but the penalty savings is meaningful for someone on a fixed income.

Frequently Asked Questions