New 401(k) Rules Allow Early Withdrawal Penalty-Free for Long-Term Care—But There's a Catch

The financial landscape around retirement planning just shifted. A fresh policy now permits individuals to access their 401(k) accounts before reaching age 59½ without facing the standard early withdrawal penalty, provided the funds go toward long-term care insurance premiums. While this sounds like a breakthrough for savers struggling with aging-care costs, the reality includes significant limitations and tax implications that deserve careful consideration.

The Growing Crisis of Long-Term Care Costs in America

The need for long-term care affects millions of older Americans, and the expenses can be staggering. According to Genworth and Care Scout, the average annual cost of assisted living facilities runs approximately $70,800. A shared room in a nursing home costs around $111,325 per year, while a private room pushes toward $127,750 annually. These figures highlight why long-term care insurance has become increasingly attractive—yet Medicare provides no coverage for these services.

The insurance itself isn’t inexpensive either, making it difficult for many working adults in their 50s to budget for premiums. This affordability challenge is where the new policy intervention comes in.

How the Updated 401(k) Rules Work Without Early Withdrawal Penalty

The new framework allows withdrawals of up to $2,600 in 2026 to fund long-term care insurance premiums without triggering the standard 10% early withdrawal penalty that normally applies to distributions taken before age 59½. Future years will see this limit adjusted for inflation.

However, several critical restrictions apply. First, your specific 401(k) plan must explicitly permit this withdrawal option—not all plans have adopted the provision. Second, you cannot withdraw more than 10% of your total 401(k) balance for this purpose. So if your account contains $15,000, your maximum withdrawal would be $1,500, regardless of whether your insurance premium exceeds that amount.

What You Need to Know Before Withdrawing

While the early withdrawal penalty disappears under this new rule, one crucial detail remains: you’ll still owe income taxes on the withdrawn amount. This distinction is vital. The elimination of the penalty doesn’t translate to penalty-free access—it means avoiding a specific 10% penalty while still remaining subject to your ordinary income tax rate.

Additionally, any money removed from your 401(k) stops growing and generating returns. For retirement accounts designed to compound over decades, even a $2,600 withdrawal represents opportunity cost that extends far into your retirement years.

Consider whether your chosen long-term care insurance premium actually exceeds $2,600. If it doesn’t, you might avoid raiding your retirement altogether. Price multiple policies carefully to identify coverage you can afford through regular income or savings.

Better Alternatives to Consider First

Before tapping your 401(k), explore other options. If you maintain a health savings account (HSA), you can direct those funds toward long-term care insurance premiums and avoid income taxes entirely on that withdrawal. HSAs offer triple-tax advantages—contributions are tax-deductible, growth is tax-free, and qualified withdrawals like long-term care premiums escape taxation.

Additionally, reassess your overall retirement income strategy. The $23,760 annual increase available to certain retirees through optimized Social Security claiming strategies might provide the cushion needed to cover insurance premiums without withdrawing retirement savings early.

The bottom line: while this new 401(k) provision eliminates one barrier to accessing retirement funds for legitimate health protection, it introduces tax consequences and permanent account reductions. Explore alternatives thoroughly before using early withdrawal access, even when the early withdrawal penalty has been waived.