Workers may have a new way to help prepare for a largely unpredictable health-related expense during their golden years.
Under a new rule now in effect, 401(k) plans are permitted to let participants take limited penalty-free withdrawals to pay for long-term care insurance, which covers the cost of assistance with daily living activities such as bathing, dressing and eating — and often is needed later in life. The new rule was included in 2022 retirement legislation known as Secure Act 2.0, and had a delayed effective date of three years, or Dec. 29.
However, it comes with limitations. Experts say it’s important to consider whether using retirement money to pay for long-term care insurance makes sense — or if you should purchase a policy at all.
“The [rule] is there for people, but it might not be practical to use it,” said Carolyn McClanahan, a physician and certified financial planner based in Jacksonville, Florida. She is a member of CNBC’s Financial Advisor Council.
Typically, withdrawals before age 59½ incur a 10% penalty, as well as ordinary taxes. There are already some exceptions when the penalty doesn’t apply, including for qualified birth or adoption, certain unreimbursed medical expenses and the so-called rule of 55, which applies if you leave your company in the year you turn age 55 or later.
