New 2026 Tax Break Lets You Tap Retirement Savings Penalty-Free for Long-Term Care Insurance

You probably feel the tension between two competing worries: outliving your money in retirement and needing help with everyday activities because of aging, illness, or cognitive decline.

Those are two reasonable concerns since you are likely to live a long time, and longevity is the biggest reason you may need long-term care. Likely? Yes, very likely.

Federal researchers estimate that 56% of Americans turning 65 today will develop a disability or aging issue serious enough to require long-term services. Many families, according to AARP, will face hundreds of thousands of dollars in potential extended care costs, with a significant share who have already had to pay out of pocket.

Health insurance, including Medicare, only pays for short-term skilled care. Without Long-Term Care Insurance, you will pay for these costs from your income and assets and place an incredible burden and stress on those you love.

Long-Term Care Insurance is a solution to help you access the quality long-term care you will need, protecting your assets and easing family burden.

An LTC policy already offers important tax advantages, and benefits generally remain tax-free when you need care. However, in 2026, another tax incentive is available.

Qualified Money for LTC Premiums

Think about all the money you have stashed away for your future retirement. Qualified money is money that has yet to be taxed, like money you have saved in your employer's 401(k), an IRA, 401(b), and other similar accounts.

You might be like many other people who have hundreds of thousands in these accounts, but you can't yet use the funds. Yet, Long-Term Care Insurance is intended, in part, to protect those funds.

Here is the dilemma: many people purchase LTC Insurance in their 40s and 50s; however, there is a penalty to withdraw funds before age 59½.

Now there is a solution, courtesy of Uncle Sam. Beginning with distributions made after late December 2025 (for the 2026 tax year), a new rule adds another tool: you can use a limited portion of your retirement account to pay Long-Term Care Insurance premiums without the usual 10 percent early-distribution penalty if you are under 59½.

That change will not solve the long-term care financing crisis. It does, however, give you one more way to coordinate retirement and care planning so you are not forcing your adult children or spouse into crisis caregiving later.

The 2026 Rule in Plain English: Penalty-Free LTC Distributions From Retirement Plans

The change comes from Section 334 of the SECURE 2.0 Act of 2022, which created a new category of “qualified long-term care distributions.”

Beginning with distributions made after December 29, 2025, many employer retirement plans may allow you to take a limited distribution to pay premiums on certified Long-Term Care Insurance, without the 10% early-withdrawal penalty that usually applies when you are under age 59½.

The distribution is still taxable as ordinary income. The new rule waives only the additional 10 percent tax under Internal Revenue Code §72(t) for early distributions.

Which plans can offer it?

The statute lets certain defined contribution plans allow these distributions, including:

• Most 401(k) plans
• Many 403(b) and 403(a) annuity plans
• Some governmental 457(b) plans

Financial-industry summaries suggest that IRAs may also be covered as “eligible retirement plans,” although final IRS guidance will clarify the details.

At this point, IRAs should not be assumed to qualify for the new penalty-free LTC-distribution rule under SECURE 2.0. The better bet, for now, is that only employer-sponsored defined contribution plans (401(k), 403(b), etc.) can offer it, and only if their plan sponsor amends the plan accordingly.

A critical nuance: plan sponsors are not required to offer this feature. Remember, employers must decide whether to amend their plans.

Most employers do not offer group Long-Term Care Insurance, since such plans are rare and generally much more expensive than plans sold outside groups. Some of those group plans are not even qualified Long-Term Care Insurance under Section 7702(b). Because of that, some experts suggest they may ignore allowing their plan to offer this benefit.

How Much Can You Withdraw?

For any tax year, your qualified LTC distribution is capped at the least of:

1. The premiums actually paid (or billed) during the year for certified LTC Insurance coverage
2. 10% of your vested retirement account balance under that plan
3. A dollar limit that is indexed for inflation

The statute set the dollar limit at $2,500 in 2026 dollars, with adjustments to be made going forward.

IRS 2026 cost-of-living tables and tax-practice summaries show the qualified LTC Insurance distribution limit for 2026 is $2,600.

$2600 can go a long way toward paying for LTC Insurance for many people. For example, a 50-year-old couple can acquire Long-Term Care Insurance for under the limit, depending on the insurance company, health, and the total amount of benefits purchased.

How Much Does Long-Term Care Insurance Cost?

Long-Term Care Insurance premiums are different for everyone. Costs depend on a many factors such as location, total benefits within the policy, pre-existing health conditions, riders, gender, monthly benefit amounts, marital status, age, and the company you choose. 

• How Much Does Long-Term Care Insurance Cost?

Approximate Monthly Premium with a 3% Compound Inflation Rider at Age 50

2026 Rules for Penalty-Free Long-Term Care Insurance Distributions

You may also be able to use the distribution to pay for certified LTC Insurance coverage for a spouse or certain family members; the Senate Finance Committee report indicates this flexibility but leaves the full details to the Treasury Department, which has not yet clarified this as of this writing.

What Counts As “Certified” Long-Term Care Insurance?

A certified Long-Term Care Insurance policy means it is a federally tax-qualified policy meeting federal guidelines. You cannot use this new tax break for just any policy with the words “long-term care” in the brochure.

• 7702(b)-qualified LTC Insurance coverage

To qualify, premiums must be paid for “certified long-term care insurance,” which SECURE 2.0 ties to federally tax-qualified LTC coverage under Internal Revenue Code §7702(b) and related rules.

Generally, that means:

• The policy covers only qualified long-term care services for a chronically ill individual following a written plan of care.
• The contract meets consumer-protection standards, including limitations on premium increases and non-forfeiture protections.

RELATED: What are Long-Term Care Insurance Regulations

Most traditional Long-Term Care Insurance policies meet 7702(b) rules. Many hybrid life or annuity policies with LTC riders do not, especially if they were designed primarily as life insurance with a non-qualified rider rather than as tax-qualified LTC coverage. However, there are several outstanding hybrid policies that do meet federal guidelines under Section 7702(b).

RELATED: Compare Long-Term Care Insurance Companies and Products

If you are considering a new policy, ask your LTC Insurance specialist and tax advisor directly:

• Does this policy qualify under §7702(b)?
• Will premiums be eligible for medical expense deductions and the new qualified LTC distribution rules?

Be sure to seek help from a qualified Long-Term Care Insurance specialist to get quotes and shop for qualified Long-Term Care Insurance.

You need to verify that your policy is a 7702(b)-qualified LTC Insurance contract and that your insurer can provide the documentation your plan administrator will require. The LTC News guide on Long-Term Care Insurance tax deductions walks through how to check that on your policy’s first page.

Existing LTC Tax Breaks Still Matter: 2026 Deduction Limits

The new 2026 rule adds to, rather than replacing, existing Long-Term Care Insurance tax incentives.

For the 2026 tax year, the IRS inflation-adjusted limits on “eligible LTC premiums” you can treat as medical expenses are

The new qualified LTC distribution rule gives you a different advantage: you can avoid the 10 percent early-distribution penalty when premiums are paid from certain retirement accounts, up to the annual cap.

From a pure tax perspective, you may get more value by:

• Using pre-tax sources where available (employer or business deductions, HSAs)
• Coordinating itemized medical deductions with your overall tax picture
• Using the LTC distribution feature strategically in years when you need liquidity and want to avoid the early-withdrawal penalty

The optimal mix depends on your age, income, plan design, and whether you own a business.

How The New Rule Works in Practice: Example

These examples are simplified and ignore state taxes, other deductions, and phaseouts. They are for illustration only, not tax advice.

Example: 52-Year-Old Employee Funding LTC Premiums From a 401(k) in 2026

You are 52 in 2026 with a $250,000 vested 401(k) and purchase a new 7702B-qualified Long-Term Care Insurance policy with a $1,750 annual premium.

• 10% of your vested balance is $25,000, far above your premium amount.
• The 2026 LTC distribution cap is $2,600, which also exceeds your premium.
• Because your premium is only $1,750, that becomes your maximum qualified LTC distribution.

If your employer adopts the SECURE 2.0 LTC distribution feature, you elect a $1,750 qualified LTC distribution, paid directly to the insurer.

The amount:

• is taxable as ordinary income, because the rule waives only the 10% early-withdrawal penalty, not income tax.
• Results in $420 in federal income tax at a 24% marginal rate (0.24 × $1,750 = $420).

Effective after-tax cost:

• You get your LTC Insurance coverage, but only pay $420 in tax, meaning your net cost is $1,330, plus any state tax impact.

Risks, Limits, And Open Questions

The new provision is helpful but far from a silver bullet. You need to understand its limits and potential pitfalls.

1. Retirement Savings Still Shrink

Every dollar you withdraw—even penalty-free—is a dollar that no longer compounds for retirement.

That tension is real:

• You need LTC Insurance coverage.
• You also need lifetime income.

Be sure you have enough retirement savings in your qualified account to withdraw money now to pay for the premium.

Getting an LTC policy when you are younger means you lock in your good health and premium level, rather than waiting until you are older and facing health issues that will result in higher premiums.

2. Distributions Still Increase Taxable Income

The LTC distribution:

• Is included in your gross income, even though the 10% penalty does not apply.

3. Employers Must Adopt and Administer the Feature

The benefit might be an excellent idea, but if your employer will not adopt it, you are out of luck.

• Plans need amendments and systems to verify that distributions go to certified LTC Insurance coverage.
• Employers must decide whether the feature fits their workforce and benefits strategy.

Not every plan will choose to offer qualified LTC distributions in 2026. You should not assume your 401(k) will automatically support the new rule.

4. Policy Eligibility and Underwriting Still Matter

The tax break does not change:

• Medical underwriting rules for LTC Insurance
• Age-based premium differences
• The need to apply when you are still relatively healthy, often between ages 45 and 70

Waiting until 2026 just to use the LTC distribution feature could backfire if health issues arise and you can no longer qualify for coverage.

5. Guidance Is Still Evolving

At the time of writing, some details still depend on IRS regulations and additional guidance, including:

• Exact reporting codes for Form 1099-R
• Treatment of certain hybrid policies and riders
• Coordination with state tax rules

Professional tax and benefits organizations are watching for regulations that clarify gray areas.

Tools for Long-Term Care Planning

As you evaluate the new 2026 tax feature, you can use LTC News tools and resources to ground your decisions in real numbers:

• The LTC News Cost of Care Calculator shows current and projected care costs in your city or state so you can size benefits realistically.
• The LTC News Caregiver Directory helps you explore home-care providers and facilities nationwide, giving you a sense of what quality care actually looks like where you live.
• The LTC News guide to Long-Term Care Insurance tax deductions explains 2026 age-based limits, business deductions, and how LTC benefits remain tax-free.
• Compare Long-Term Care Insurance Companies and Products.

You can combine those tools with your own financial plan to answer a central question: How much retirement income do you want to protect from the costs and burdens of long-term care?

Bottom Line: A Helpful New Tool, Not A Stand-Alone Solution

The new 2026 tax rule letting you take penalty-free, limited distributions from retirement plans to fund Long-Term Care Insurance is a welcome addition to the planning toolkit.

LTC Insurance premiums at younger ages are much lower, and the need to use a penalty-free, limited distributions may not apply for many people. However, for some people, especially those with cash flow issues or who wish to purchase more expensive plans, this new initiative can be helpful.

Used wisely, it can:

• Ease cash-flow pressure in your 50s and early 60s
• Make it easier to purchase LTC Insurance while paying for college expenses.
• Enhance existing deductions and business planning strategies

This article provides general information only and is not intended as tax, legal, or investment advice. Tax laws and interpretations can change, and individual situations vary.