Your 401(k) is one of the best places you can stash retirement savings, but it comes with a trade-off: You agree not to touch your savings until you're at least 59 1/2. Failure to comply can result in a 10% early withdrawal penalty, plus ordinary income taxes if the money comes from a traditional 401(k).
This rule has exceptions for things like paying for large medical bills, becoming disabled, or being diagnosed with a terminal illness. And as of a month ago, there's a new exception to the early withdrawal penalty, but it's a bit of a mixed bag.
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You can now make 401(k) withdrawals to pay for long-term care insurance
As of Dec. 29, 2025, you can make penalty-free withdrawals of up to $2,600 to buy long-term care (LTC) insurance for you or your spouse. This amount may increase in future years due to inflation.
LTC insurance can help cover the cost of nursing home or assisted living stays, as well as home healthcare. Traditional health insurance and Medicare typically don't cover these expenses, leaving families to pay for them entirely out of pocket.
Investing in LTC insurance could make sense for you if you or your spouse has a family history of longevity or chronic illness, and your income is high enough that you likely won't qualify for Medicaid. It could also make sense for those who want to remain in their homes for as long as possible. LTC insurance can pay to cover the costs of home modifications to allow you to continue living there as you age.
That said, LTC insurance isn't cheap, especially if you're older when you purchase the policy. So you have to decide whether you can shoulder the cost in the present.
Should you use your 401(k) to pay for LTC insurance?
If you're set on buying LTC insurance and you can't afford to pay for it out of pocket, being able to take a penalty-free 401(k) withdrawal is a nice option to have. But it's important to recognize the trade-offs.
You'll be setting your retirement savings back, so you may need to save even more money going forward to reach your retirement saving target on time. Or you might have to delay retirement to give yourself some additional time to save.
It doesn't hurt to price out LTC insurance first and then make your decision. If you decide to go ahead with it, make sure you don't withdraw more than $2,600 from your 401(k), or you will pay a 10% early withdrawal penalty on the excess.
