The New 401(k) Long-Term Care Rule: Penalty-Free Withdrawals for Insurance Premiums in 2026

Buried in the sweeping SECURE 2.0 legislation that Congress passed in late 2022 was a provision that retirement savers are only now discovering: the ability to make penalty-free withdrawals from 401(k) plans to pay for long-term care insurance premiums. The rule took effect in 2026, and financial advisors say it could prove transformative for workers trying to prepare for one of retirement's most significant financial risks.

Understanding the New Rule

Under the new provision, 401(k) plans are permitted—though not required—to allow participants to take limited penalty-free withdrawals specifically to pay for long-term care insurance premiums. Here are the key parameters:

• Annual Limit: The withdrawal is capped at the cost of your annual insurance premium, up to $2,600 for 2026. This limit will be indexed for inflation in future years.
• Account Balance Limit: The amount you withdraw cannot exceed 10% of your vested account balance.
• Penalty Waiver: The normal 10% early withdrawal penalty for those under age 59½ is waived for qualifying distributions.
• Taxes Still Apply: While the penalty is waived, the withdrawal is still subject to ordinary income tax.

This represents a significant departure from traditional 401(k) rules, which generally impose a 10% penalty on withdrawals before age 59½ unless specific hardship exceptions apply.

Why Long-Term Care Planning Matters

Long-term care represents one of the most significant financial risks facing retirees, yet it's one that many Americans overlook or underestimate. The statistics are sobering:

• Approximately 70% of Americans turning 65 today will need some form of long-term care in their lifetimes
• The average annual cost of a private room in a nursing home exceeds $100,000 in many parts of the country
• Medicare does not cover long-term custodial care, leaving retirees to pay out of pocket or rely on Medicaid after depleting their assets
• A healthy 55-year-old couple can expect to pay $3,000 to $5,000 annually for a comprehensive long-term care insurance policy

Despite these realities, only about 7.5 million Americans currently have long-term care insurance policies. The high cost of premiums—and the perception that it's an expense that can be deferred—leads many workers to put off this crucial protection.

How the New Rule Helps

The new 401(k) provision addresses a key barrier to long-term care insurance adoption: premium affordability during peak earning years when workers are also trying to maximize retirement savings.

"This creates a bridge for workers who want long-term care protection but struggle to fit premiums into their current budget alongside retirement contributions. By allowing penalty-free access to 401(k) funds specifically for LTC insurance, Congress has acknowledged that protecting against catastrophic care costs is a legitimate retirement planning priority."

— Financial planning industry analysis

Consider a practical example: A 50-year-old worker with a $300,000 401(k) balance and an annual long-term care insurance premium of $2,400 could withdraw that amount without incurring the 10% early withdrawal penalty. While they'd still owe income tax on the withdrawal, they'd save $240 in penalties—and more importantly, they'd have a path to maintaining crucial insurance coverage.

Important Caveats

Before rushing to tap your 401(k) for long-term care premiums, several important considerations apply:

Plan Adoption Is Optional

The key phrase in the legislation is that plans are "permitted" to offer this option—it's not mandated. Your employer's 401(k) plan must specifically adopt this provision for you to take advantage of it. Workers should check with their HR departments or plan administrators to confirm whether their plan has implemented this feature.

The 10% Account Balance Cap

The requirement that withdrawals cannot exceed 10% of your vested account balance means workers with smaller 401(k) balances may not be able to access the full $2,600 annual limit. For example, someone with a $20,000 balance would be limited to a $2,000 withdrawal, even if their insurance premium is higher.

Impact on Retirement Savings

While paying for LTC insurance is valuable, withdrawing from your 401(k) reduces the assets available for compound growth. A $2,600 annual withdrawal over 15 years, assuming 7% annual returns, represents roughly $70,000 in foregone retirement wealth. Workers need to weigh this trade-off carefully.

Tax Implications

The penalty waiver doesn't mean the withdrawal is tax-free. Traditional 401(k) distributions are taxed as ordinary income, so a $2,600 withdrawal could result in $600-900 in additional federal taxes depending on your bracket, plus any state income taxes.

Other SECURE 2.0 Withdrawal Provisions

The long-term care provision is part of a broader SECURE 2.0 effort to provide more flexibility for retirement account access. Other notable provisions include:

• Emergency Withdrawals: Beginning in 2024, individuals can withdraw up to $1,000 from IRAs or 401(k) plans for unforeseeable or family emergencies without penalty, with up to three years to repay
• Qualified Disaster Distributions: Up to $22,000 for qualified disaster recovery without the 10% penalty
• Domestic Abuse Survivors: Up to $10,000 (indexed for inflation) or 50% of vested balance, whichever is less, without penalty

Should You Use This Option?

The decision to tap 401(k) funds for long-term care insurance depends on individual circumstances:

Consider it if:

• You have adequate retirement savings but struggle with cash flow for insurance premiums
• You're in a lower tax bracket and the income tax hit is manageable
• You have a family history of conditions requiring long-term care
• You have no other coverage options through your employer or spouse

Think twice if:

• Your 401(k) balance is relatively small and you need maximum growth
• You're in a high tax bracket and the withdrawal would be heavily taxed
• You have other assets that could be used for LTC premiums without tax consequences
• You're close to 59½ and could soon access funds without any penalty anyway

The Bigger Picture

This new provision reflects a growing recognition that retirement security involves more than just accumulating assets—it also requires protecting those assets against catastrophic expenses. Long-term care represents perhaps the biggest wildcard in retirement planning, with costs that can quickly deplete even substantial savings.

By creating a penalty-free pathway to fund LTC insurance through 401(k) withdrawals, policymakers have given workers an additional tool to address this risk. Whether it's the right tool for your situation requires careful analysis of your overall financial picture, health considerations, and retirement goals.

If you're considering this option, consult with a financial advisor who can help you model the long-term impact on your retirement readiness and evaluate whether long-term care insurance is the right approach for your family's needs.