Can I Use My 401(k) to Pay for Long-Term Care? What Georgia Retirees Should Know

Here is a question that comes up at my kitchen table meetings all over Perry and Warner Robins. "Most of what we have is in our 401(k). Can we use that to take care of the long-term care problem?" The short answer is yes, you can. The longer answer is that how you do it matters as much as whether you do it, because the IRS treats every dollar coming out of that account as taxable income. Done thoughtfully, your 401(k) can fund real protection. Done carelessly, you can hand the IRS a tip you never needed to leave.

Can I use my 401(k) to pay for long-term care coverage?

Yes. There is no rule that says 401(k) money cannot pay for long-term care premiums or long-term care itself. Your 401(k) is simply a bucket of your own savings with a tax label on it. Once you withdraw the money, it is yours to spend on anything, including coverage that protects the rest of your savings.

And that protection question is not a small one. An estimated 70 percent of adults who reach age 65 will develop severe long-term care needs before they die, according to the U.S. Department of Health and Human Services. Here in Georgia, the 2025 CareScout Cost of Care Survey puts the median cost of a private nursing home room at $113,150 per year, assisted living at $60,600, and a home care aide at $73,216. Those are Middle Georgia kinds of numbers, not New York numbers, and they are still enough to drain a nest egg in a hurry.

One more thing worth saying plainly. Medicare does not pay for long-term custodial care, so "Medicare will handle it" is not a plan. That leaves your savings, and for most working families, the biggest pile of savings sits inside a 401(k) or IRA.

What happens tax-wise when I pull money out of my 401(k)?

Every dollar you withdraw from a traditional 401(k) gets taxed as ordinary income in the year you take it, the same as a paycheck. If you are under 59 and a half, the IRS usually adds a 10 percent early withdrawal penalty on top, though there are exceptions, including unreimbursed medical expenses above 7.5 percent of your income. Most people reading this are past that age, so the penalty is not the issue. The bracket is the issue.

Picture a small bucket sitting above a bigger one. As long as what you pour stays inside the small bucket, you are fine. But once you fill it up, the extra spills over into the big bucket below. Your tax brackets work the same way. Your Social Security, pension, and regular withdrawals already fill the small bucket partway. A big lump-sum 401(k) withdrawal pours right on top, and everything above your current bracket spills into the higher one, which simply means more money owed to the IRS. Pull out $80,000 in one year to pay for a policy all at once and a chunk of it may be taxed at a rate you have never paid in your life.

There is a second, sneakier cost. Medicare premiums are income-based, with a surcharge called IRMAA that looks back at your income from two years earlier. In 2026 the surcharge starts once income crosses $109,000 for a single filer or $218,000 for a couple, and one dollar over the line triggers it. A big withdrawal this year can quietly raise your Medicare bill two years from now.

And remember, this money is coming out eventually whether you like it or not. Once you reach age 73, the IRS makes you start taking required minimum distributions from traditional 401(k)s and IRAs every single year.

What is the smart way to use 401(k) money for long-term care?

The smart way is a plan measured in years, not a withdrawal measured in one check. Here are the approaches we walk through with clients at Crossroads Financial.

Spread it out. Instead of one big withdrawal, take smaller planned withdrawals over several years to fund coverage, keeping each year's income inside your current bracket. Same destination, smaller tax toll along the way.

Put your RMDs to work. If you are already taking required minimum distributions, you are already paying tax on that money every year. Redirecting some of it toward long-term care protection turns a forced withdrawal into something useful, like putting a chore to work instead of just checking a box.

Use annuities built for care. Some annuities include long-term care benefits, and they typically use simplified underwriting with no medical exam. For someone whose health history would make traditional underwriting a struggle, this can be the difference between having protection and going without. Qualified money can often be repositioned into these through a rollover rather than a taxable lump sum, and we walk through the fit case by case.

Know what a 1035 exchange can and cannot do. Thanks to the Pension Protection Act, a nonqualified annuity or life insurance policy can be exchanged tax-free into coverage with long-term care benefits, and benefits paid for care from these policies can come out income-tax-free. That is a wonderful tool, but it only applies to nonqualified money. Your 401(k) and IRA cannot go through that door, which is exactly why they need the multi-year planning above.

If you want a deeper tour of the funding options side by side, we covered them in how to pay for long-term care.

Are long-term care premiums tax deductible?

Sometimes, within limits. The IRS lets tax-qualified long-term care insurance premiums count as medical expenses up to age-based caps. For 2026 those caps are $4,960 per person for ages 61 to 70 and $6,200 for anyone over 70. You only get the deduction if your total medical expenses clear 7.5 percent of your adjusted gross income, which happens more often in retirement than during working years.

Here is the honest caveat. Most of the hybrid and linked-benefit policies popular today do not qualify for that premium deduction. We would rather you have guaranteed coverage without a deduction than a deductible premium that can climb on you later. Pick the protection first; let the tax perk be gravy if it shows up.

Why not just buy traditional long-term care insurance with the money?

Because traditional long-term care insurance carries a premium risk we are not willing to hand to someone on a fixed income. Those premiums are not guaranteed, and I've yet to come across a client with a policy who hasn't seen at least one premium increase. We wrote about what those rate increase letters look like and the options they leave you. That is why Crossroads Financial does not use traditional long-term care insurance. We focus on hybrid life insurance with long-term care benefits, linked-benefit policies with premiums and benefits that are contractually guaranteed, and annuities with long-term care benefits. You can learn more on our long-term care page or over at TalkLTC.com, where we answer these questions all day long.

Quick answers to common questions

Can I use my 401(k) to pay for long-term care coverage?

Yes. There is no rule against it. Withdrawals from a traditional 401(k) are taxed as ordinary income, so the wise move is spreading withdrawals over multiple years instead of taking one large distribution.

Will a big 401(k) withdrawal raise my Medicare premiums?

It can. Medicare's IRMAA surcharge is based on your income from two years earlier, so a large withdrawal today can raise your Part B and Part D premiums down the road.

Are long-term care premiums tax deductible?

Tax-qualified policies are, up to age-based limits of $500 to $6,200 per person in 2026, and only when your medical expenses exceed 7.5 percent of your adjusted gross income. Most hybrid policies do not qualify.

Is there coverage that skips the medical exam?

Annuities with long-term care benefits typically use simplified underwriting with no exam, which helps people who would struggle to qualify for traditionally underwritten coverage.

What should I do first?

Before you touch the 401(k), get a plan for the withdrawals. Sit down with someone who can run the tax math over several years, not just one. That single step is the difference between funding your protection and funding the IRS.

If you are in Perry, Warner Robins, Macon, or anywhere in Middle Georgia and want to talk through what this looks like with your own numbers, that is exactly the conversation we love to have. Come by, bring your statements, and we will figure it out together in plain English.