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New Bill May Allow Penalty-Free 401(k) Withdrawals for This Retirement Expense


When planning for the future, health care ranks as one of the highest concerns for both savers and retirees alike. Not only are health care costs rising by more than 5% every year, but rampant inflation and volatile market performances have also added extra pressure to retirement savings, making many older Americans wonder if they can retire after all.

New legislation aims to ease some of the worries: House Financial Services Committee member Ann Wagner (R-MO) has introduced a bill to help reduce the cost burden of long-term care. Over half of all individuals over the age of 65 are expected to need some form of long-term care by 2030, and this new bill may help you pay for it.

A financial advisor could help you plan for retirement and help you determine if withdrawing early from your retirement accounts is appropriate for you. Find a qualified advisor today.

Representative Introduces New Bill to Help With Long-Term Care

On March 16, Rep. Wagner introduced the Long-Term Care Affordability Act. Long-term care ranks as the second greatest financial concern for Americans, right behind retirement savings, and this bill aims to provide favorable tax treatment to help.

Long-term care encompasses services designed to help people live as independently as possible when they have a serious illness or disability that prevents them from doing everyday activities on their own, like bathing, eating and getting dressed. Individuals may need long-term care after sudden illness strikes, such as after a heart attack or stroke, but other times the need for care comes gradually as an underlying issue becomes apparent.

Half of older Americans have insufficient funds to hire a home health aide for a year, and so many turn to buying long-term care insurance to cover any unexpected expenses. The Long-Term Care Affordability Act would allow individuals to withdraw funds from their retirement accounts, including 401(k), 403(b), 457(b) and IRAs, to pay for long-term care insurance without paying the 10% early-withdrawal penalty. It would also exclude up to $2,500 in verified withdrawals from income tax. Given that the majority of Americans who purchase long-term care insurance do so before retirement, this would help encourage individuals at all ages to plan for the future.

Why Is Long-Term Care Insurance Important?

401k withdrawls for ltcLong-term care insurance should be strongly considered as part of your long-term financial planning, as it covers the cost of help for daily-living when you’re no longer able to do so by yourself. You won’t qualify for long-term care insurance if you already have a debilitating condition, so you must purchase it before you need it. Medicare only covers short nursing home stays or limited home health care when you need skilled help following an operation or injury, and Medicaid will only cover you once your income falls to the applicable low-income threshold.

How Retirement Savers Can Take Advantage

Long-term care can quickly deplete your retirement savings, so buying long-term care insurance can help protect your future. For example, insurance provider Genworth estimates that the 2021 national median cost for a home health aide costs $5,148 a month, while getting a private room in a nursing home can cost you $9,403 a month. On the other hand, long-term care insurance premiums for a 55-year-old man average $1,700 a year and can cover up to $386,500 should you need it when you’re 85.

It may help to speak with an advisor to see if long-term care insurance is a good option for you, as there are several long-term care options that may cover your needs. If the Long-Term Care Affordability Act is passed and signed into law, you may be able to pay for your insurance premiums with tax-free dollars, but you should strongly consider whether withdrawing early from your retirement accounts is a wise choice for your situation. In certain cases it may be the most financially-savvy decision, but in others it may be better to pursue other options.

Bottom Line

401k withdrawls for ltcLong-term care is a pressing concern for many Americans, and a new bill has been introduced to address its cost. The Long-Term Care Affordability Act aims to make it possible to withdraw long-term care insurance premium costs from your tax-advantaged retirement accounts without paying any taxes or fees. It may be beneficial for you to consider buying long-term care insurance, since long-term care is very costly and often not covered under your regular health insurance.

Retirement Planning Tips

  • Not sure if withdrawing from your 401(k) to pay for health expenses will negatively impact your retirement plans? For solid, long-term financial help, consider speaking with a qualified financial advisor. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Use SmartAsset’s free retirement calculator to get a good estimate of how much money you’ll need to retire.

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