Proposal to Allow Use of Qualified Money for Long-Term Care Now Law

As more American families face the challenges of Alzheimer's and other dementia, along with other chronic health and aging issues, the need for long-term health care planning has never been more apparent. You’ve worked for decades to build your retirement savings. The last thing you want is to watch those assets disappear because of a long-term care event you didn’t plan for.

For years, policymakers discussed a solution—allowing you to use retirement funds more easily to pay for Long-Term Care Insurance. Today, that idea is no longer theoretical. It is now part of federal law.

The concept of using “qualified money”—like funds in a 401(k)—to pay for Long-Term Care Insurance had been discussed for years. The goal was simple: make it easier for you to protect your retirement savings from the high cost of care. Former U.S. Senator Pat Toomey (R-PA) made efforst years ago to make this happen. 

That concept became reality under the SECURE 2.0 Act, specifically Section 334.

👉 Beginning in 2026, certain retirement plans can now allow:

• Penalty-free withdrawals to pay for qualified Long-Term Care Insurance premiums
• Relief from the 10% early withdrawal penalty that typically applies before age 59½

However, this new flexibility comes with important limitations.

Money in Qualified Retirement Accounts Can Be Accessed Without Penalty

How the New Rule Works — Under current guidance:

• You may withdraw a limited amount each year (approximately $2,500–$2,600 in 2026, indexed for inflation)
• Funds must be used to pay qualified Long-Term Care Insurance premiums
• The withdrawal is still taxed as ordinary income

Eligible plans may include:

• 401(k) plans
• 403(b) plans
• Governmental 457(b) plans

👉 The key benefit is simple: you avoid the penalty—but not the taxes.

The SECURE 2.0 Act provides new flexibility for retirement savers, including limited access to funds for long-term care insurance premiums, but it is not a substitute for comprehensive planning.” — Plan Sponsor Council of America.

Why This Matters for Your Retirement Plan

For years, there has been a disconnect:

• You save in tax-deferred retirement accounts
• Early access triggers penalties
• Long-Term Care Insurance is more affordable when purchased earlier

This law helps bridge that gap—at least partially—by giving you another way to fund protection without penalty.

What Qualifies?

To use this provision:

• The policy must be tax-qualified Long-Term Care Insurance under federal rules (IRC Section 7702(b))
• Not all hybrid or asset-based policies will qualify

👉 Working with a knowledgeable Long-Term Care Insurance specialist is critical to ensure eligibility.

LTC Insurance is More Affordable When Purchased Younger

Those with excellent health could be qualified for preferred health discounts. While Long-Term Care Insurance premiums vary widely between insurance companies, an LTC News survey of LTC Insurance premiums indicates that a 55-year-old couple with 'standard' health can obtain a modest comprehensive policy for around $3100 a year. More comprehensive benefits can be found with a premium of around $4500 a year for a couple (not each.) This amount is well under the $2500 per person allowance offered with this proposal. 

Almost half of all Long-Term Care Insurance is purchased by individuals aged 45 to 59, according to the 2021 Milliman Long-Term Care Insurance Survey published by Broker World Magazine. 

According to the U.S. Census Bureau, 50 percent of individuals who live beyond age 65 will need some long-term care, and more than half of American households contribute to retirement accounts. All of them would be eligible to pay for a Long-Term Care Insurance policy with retirement savings under this legislation.

People require long-term health care due to changes in their health, accidents, or age-related issues like dementia or frailty. The risk increases as a person get older.

Health Insurance and Medicare Won’t Pay for Most Long-Term Care Services

Health insurance, including Medicare and supplements, will not pay for most long-term health care services as they are custodial in nature - in other words, they address people's need for assistance with daily activities or supervision due to cognitive decline.  

Medicaid will pay for long-term care services; however, you must have little or no income and assets to qualify for this benefit. Long-Term Care Insurance is designed to provide guaranteed tax-free benefits for all areas of long-term care, including in-home care, adult day care, assisted living, memory care, and traditional nursing home care. 

The costs of long-term care services can be staggering and adversely impact a family's income, assets, lifestyle, and legacy. The LTC NEWS Cost of Care Calculator indicates the costs do vary depending on where a person lives. Nursing home care is the most expensive, with a national average of over $100,000 a year. Other types of care are less expensive but not cheap. 

Long-Term Health Care is Costly – Getting More Expensive

All long-term health care costs are increasing every year as demand outweighs supply and labor costs are increasing - Cost of Care Calculator - Choose Your Location. Most experts say as Generation X and Late-Boomers get older - along with the remaining Baby Boomers - demand for care services will continue to increase dramatically in the coming decades.

Alzheimer’s and Dementia Devastating to Families

"Alzheimer's is a devastating and fatal disease impacting millions of Americans," said Robert Egge, Alzheimer's Association Chief Public Policy Officer, and Alzheimer's Impact Movement (AIM) Executive Director. 

"One of the most expensive diseases in the nation, for too many American families paying for the costs associated with caring for a loved one is a challenge. We are grateful to Senator Toomey for his leadership in re-introducing the Long-Term Care Affordability Act. This bill could make a meaningful impact for families struggling to pay for care, by making Long-Term Care Insurance more accessible by creating the ability to use retirement plan funds to obtain the insurance," Egge said.

The State of Washington is in the process of encouraging the purchase of Long-Term Care Insurance through the Washington State Long-Term Care Trust Act (now known as the Washington Cares Fund). A new state tax will fund a minimal long-term care benefit unless a person purchases a qualified Long-Term Care Insurance policy. Several other states are looking at similar laws. Washington State has some of the most expensive long-term care costs in the country, with in-home care averaging around $5700 a month (based on a 44-hour workweek) Washington Long-Term Care | LTC News.

LTC Insurance is Medically Underwritten

Long-Term Care Insurance is medically underwritten, so an individual must have reasonably good health to obtain coverage. The underwriting criteria vary depending on the insurance company. The older a person waits to obtain coverage; the more likely pre-existing health can make it either much more expensive or unavailable. Most people are purchasing Long-Term Care Insurance well before retirement - Majority of LTC Insurance Buyers are in Their 50s.

Premiums also vary dramatically between insurance companies and are based, in part, on age, health, family history, and the amount of benefits being purchased. LTC Insurance is custom-designed, so the consumer gets to decide the size of their policy. 

Tax Incentives Available with LTC Insurance

Federal law does provide for some tax incentives Long-Term Care Tax Benefits Guide. Some states offer state tax incentives as well. Forty-five states offer Partnership Long-Term Care Insurance plans with dollar-for-dollar asset protection - Compare State's Long-Term Care Details.

Aging is part of life, and we all experience changes in our health, body, and mind as we get older. Preparing for the costs and burdens of aging will not only protect income and assets but allow your loved ones the time to be family instead of caregivers.

FAQs: Using Retirement Funds for Long-Term Care Insurance

Can you use retirement funds to pay for Long-Term Care Insurance in 2026?
Yes. Under the SECURE 2.0 Act, certain retirement plans may allow limited, penalty-free withdrawals to pay for qualified Long-Term Care Insurance premiums. Availability depends on your employer’s plan.

How much can you withdraw each year?
You can withdraw a limited amount annually—generally around $2,500 to $2,600 in 2026, indexed for inflation. The exact amount depends on IRS guidance and your plan’s rules.

Are these withdrawals tax-free?
No. While the 10% early withdrawal penalty is waived, the distribution is still taxed as ordinary income.

Do all 401(k) or retirement plans offer this option?
No. This provision is optional for employers, and many plans are still in the process of adopting or evaluating it.

Can you use an IRA for Long-Term Care Insurance premiums?
Possibly, but guidance is still evolving. Most early implementation has focused on employer-sponsored plans like 401(k)s and 403(b)s.

What type of policy qualifies?
Only tax-qualified Long-Term Care Insurance policies under federal rules (IRC Section 7702(b)) are eligible. Some hybrid or asset-based policies may not qualify.

Will this cover the full cost of Long-Term Care Insurance?
No. The annual withdrawal limit is relatively modest and is best used as a supplement to other funding strategies.

Does this replace the need for long-term care planning?
No. This new rule provides flexibility, but it does not eliminate the need for a comprehensive plan. Long-term care costs can be significant and require broader financial preparation.

When does this rule take effect?
The provision applies to distributions beginning in 2026, following the passage of the SECURE 2.0 Act.

What should you do next?

• Check if your retirement plan offers this option
• Speak with a Long-Term Care Insurance specialist
• Review your overall retirement and care strategy

👉 A small change in the law can help—but a complete plan is what protects you.