Paying for long-term care insurance can put pressure on a household budget, especially when you are preparing to retire or stepping back from your business. A new retirement-plan option may offer some flexibility, but it deserves a careful look before you take money out.
Under a SECURE 2.0 provision effective for distributions made after December 29, 2025, certain employer retirement plans can permit limited withdrawals for certified long-term care insurance without the usual 10% federal early-distribution tax. The withdrawal generally remains taxable income.
For business owners and families in Colorado and Hawaii, the useful question is whether this option improves your overall financial position after taxes and the reduction in retirement savings.
Start with your plan and your insurance company
An eligible defined contribution plan, such as a 401(k) or 403(b), can choose to offer these distributions. It is optional. Your plan administrator must confirm that the feature is available.
IRAs are not eligible for this particular distribution option. Being self-employed does not automatically make every retirement account you own eligible.
The insurance requirements matter too. The coverage must meet the certified long-term care insurance rules, and the insurer must complete the required IRS disclosure process. At your request, the insurer must also file a long-term care premium statement with your retirement plan. An ordinary premium bill alone is not a substitute for that process. IRS insurer guidance
Ask both providers about eligibility before requesting a withdrawal.
How much can you withdraw in 2026?
The annual qualifying amount is limited to the smallest of:
- The certified long-term care insurance premiums paid by or assessed to you for yourself or your spouse during the year.
- 10% of your vested benefit under the plan.
- $2,600 for 2026.
If the coverage is for your spouse, the early-distribution tax exception does not apply when you file separate returns. The IRS explains these limits and eligibility conditions in Notice 2026-33.
For example, suppose your eligible annual premium is $3,200 and your vested plan balance is $20,000. Ten percent of that balance is $2,000, so the qualifying withdrawal would be limited to $2,000, assuming all other requirements are met. A larger premium does not override the account-balance limit.
Penalty relief still leaves a tax bill to consider
This provision removes a particular additional tax, not the ordinary income tax on the distribution. The usual mandatory 20% withholding for eligible rollover distributions does not apply, but other withholding rules still apply. Ask the administrator how withholding will be handled.
The benefit is most relevant when an early-distribution tax would otherwise apply. If you are already 59½ or older, avoiding that tax generally provides no additional age-based benefit. Other exceptions may also apply before that age.
Compare the withdrawal with paying the premium from available cash. Money taken out of the plan is no longer invested there for retirement, and the taxable distribution may affect other parts of your return. A penalty exception alone is not a reason to withdraw.
A premium deduction is a separate calculation
Do not assume the insurance premium will cancel out the taxable withdrawal. For an itemized federal medical deduction, eligible unreimbursed medical expenses must exceed 7.5% of adjusted gross income, and you must itemize. IRS medical expense guidance
Qualified long-term care insurance premiums also have their own age-based limits. For 2026, the maximum premium amount that can count as a medical expense, based on your age at year-end, is:
- Age 40 or younger: $500.
- Ages 41 through 50: $930.
- Ages 51 through 60: $1,860.
- Ages 61 through 70: $4,960.
- Age 71 or older: $6,200.
These are premium limits, not guaranteed deductions or tax credits. They are separate from the $2,600 retirement distribution cap. IRS 2026 inflation adjustments, section 3.27
Eligible self-employed taxpayers may instead qualify for the self-employed health insurance deduction, subject to its business-income, coverage, and premium limits. The same premium cannot be deducted twice. That deserves a separate review if you own a business. IRS Form 7206 instructions
Check the whole picture before using retirement money
Bring your insurance information, latest retirement-plan statement, and expected annual income to the conversation. Confirm the plan feature and insurer paperwork, then compare the tax cost and effect on savings with your other ways to pay.
Contact Key2 Accounting if you would like help evaluating the tax side of that decision. We work with business owners and families across Colorado and Hawaii to connect individual tax choices with their broader financial plans.