New Rule Lets Some Retirement Plans Help Pay Long-Term Care Insurance Premiums
A delayed SECURE 2.0 Tax Act provision gives certain workers and retirees a helpful way to use retirement savings: some defined contribution plans can allow distributions to be used to pay qualified long-term care insurance premiums without triggering the usual 10% early-withdrawal penalty. The rule applies to distributions made after December 29, 2025.
Defined contribution plans are those where the amount that can be contributed is limited by the tax code and include 401(k) plans, TSAs, retirement plans of self-employed people, and government retirement plans.
What this means for you
If you’re paying for qualified long-term care (LTC) insurance, this rule may let you use money from an existing retirement plan to help cover those premiums while avoiding the extra 10% tax that often applies to early (i.e., before age 59½) retirement withdrawals. That can make long-term care coverage more affordable, especially for older taxpayers who are trying to protect retirement savings and still keep needed coverage in place.
Who can use it?
This is not a general rule for all insurance premiums. It applies only when your retirement plan allows it and the money is used for premiums on a qualifying LTC insurance contract that meets the statute’s “high-quality coverage” requirements. The distribution is also limited to certain defined contribution plans.
How much can be taken out?
The annual distribution is limited to the smallest of these three amounts:
your actual long-term care premiums,
10% of your vested account balance, or
$2,500, indexed for inflation.
For 2026, that indexed dollar limit is $2,600.
So even if your premiums are higher, or your retirement account is large, the amount you can use under this rule is capped.
Is it tax-free?
Not exactly. The main benefit is that the distribution is exempt from the 10% early-withdrawal penalty. But the amount is still generally included in your taxable income unless another rule applies. Also, this type of distribution is not treated like a rollover, so the usual rollover paperwork, direct rollover rules, notice rules, and mandatory withholding rules do not apply in the same way.
How this fits with the medical expense deduction
Long-term care premiums may also count as medical expenses, but only up to age-based annual limits. For 2026, the IRS inflation-adjusted limits are $500 for age 40 or under, $930 for ages 41 to 50, $1,860 for ages 51 to 60, $4,960 for ages 61 to 70, and $6,200 for age 71 or older.
That means older taxpayers may be able to include more of their premiums as medical expenses, but still only up to the annual cap.
When taxable retirement plan distributions are used to pay the LTC premiums, the premiums are deductible as a medical expense, as long as they otherwise qualify and are not limited by the annual cap.
Why this matters
This new rule may help you keep LTC insurance in force without having to pay the 10% penalty just to access retirement funds. That can be valuable if you are retired or near retirement and need a practical way to pay for coverage that protects you from future care costs.
Key takeaways for taxpayers
If you think this rule may help you, check these points:
Does your retirement plan allow qualified long-term care premium distributions?
Does your LTC policy meet the qualifying long-term care requirements?
Is the amount within the annual limit?
Will the distribution be taxable, even though it avoids the penalty?
If you itemize, how much of the premium may still qualify as a medical expense deduction?
Bottom line
This is a narrow but useful planning tool. Starting with distributions made after December 29, 2025, it may let eligible taxpayers use retirement savings to pay qualified long-term care insurance premiums without the 10% early-distribution penalty. For the right taxpayer, that can ease cash flow and make long-term care coverage more manageable.
If you have questions related to how this tax provision might benefit you, contact this office.
More About Us
Get to Know Prestige Accounting Services Group
Offices in Flemington, NJ, and Califon, NJ
Our Mission: At Prestige Accounting Services Group, we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.
Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.
Tailored Solutions for Every Client: Whether you're a high-net-worth individual seeking comprehensive tax planning or a small business owner in need of accounting and bookkeeping assistance, we have the expertise to meet your needs. Our team takes the time to understand your specific situation and develop customized solutions that align with your goals and objectives.
Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.
Your Success is Our Priority: At Prestige Accounting Services Group, we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.
We can't wait for you to experience the Prestige Accounting Services Group difference.
Tax & Small Business Updates
Get the latest in tax and small business updates and issues that affect your finances and growth prospects.