Can You Use Qualified Funds for Long Term Care Insurance
Can You Use Qualified Funds for Long Term Care Insurance
Jason Stolz CLTC, CRPC, DIA, CAA
Yes — you can use qualified funds from an IRA, 401(k), or other tax-deferred retirement account to fund long-term care insurance. The critical clarification is that doing so is not tax-free for IRA and qualified plan money. Every distribution from a pre-tax qualified account is taxed as ordinary income in the year it is received, regardless of what it is used for — including LTC insurance premiums. What the structured strategies covered on this page accomplish is not tax elimination but tax management: controlling when, how much, and at what marginal rate those qualified dollars are taxed, while converting them into leveraged, multi-purpose long-term care protection. For non-qualified assets — older annuities, life insurance cash value — a separate tool called a Section 1035 exchange can accomplish a genuinely tax-free repositioning into long-term care. That distinction is the most important clarification anyone beginning this conversation needs before evaluating specific products. Our resource on qualified annuity taxation covers how qualified retirement account distributions are taxed, and our resource on are long-term care benefits taxable covers the offsetting good news — LTC benefits received from a qualified policy are generally income-tax free even when the premiums were paid with taxable distributions.
The landscape for using qualified funds for long-term care planning changed meaningfully with SECURE 2.0. Starting with distributions made after December 29, 2025, Section 334 of SECURE 2.0 created a new category of qualified long-term care distributions from employer retirement plans. Under this new rule, individuals under age 59½ may take a limited distribution specifically to pay premiums on a tax-qualified long-term care insurance policy without incurring the standard 10% early withdrawal penalty under IRC §72(t). The distribution is still taxable as ordinary income — the rule waives only the penalty, not the tax. As of this writing, IRS guidance has not yet confirmed whether IRAs are covered under this rule, in addition to employer plans like 401(k)s. This is a genuinely new planning opportunity — particularly for pre-retirees who previously had no mechanism to access qualified funds for LTC premiums without the penalty cost on top of the ordinary income tax. Our resource on SECURE Act 2.0 covers the full scope of SECURE 2.0 changes, and our resource on RMDs after SECURE 2.0 covers the related required distribution changes that shape the retirement planning context for this strategy.
For individuals over 59½ with large qualified retirement balances and a long-term care planning need, the most sophisticated structural approach involves three coordinated components: transferring a portion of the IRA into a tax-qualified annuity, structuring the annuity to distribute a fixed annual amount over a 10-year period, and using those annual distributions — each fully taxable as ordinary income — to fund a life insurance policy with long-term care benefits. The result is a controlled distribution timeline, a predictable annual tax liability rather than a large concentrated taxable event, and the conversion of pre-tax retirement dollars into leveraged LTC protection with a tax-free death benefit if care is never needed. Long-term care costs ranging from $60,000 to $100,000 or more annually depending on state and level of care, combined with the reality that Medicare does not cover extended custodial care — confirmed in our resource on does Medicare cover long-term care — make a structured funding strategy with meaningful leverage a compelling alternative to self-funding from a retirement portfolio.
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Request a Qualified Funds LTC ReviewFour Approaches to Using Qualified Funds for Long-Term Care
The right strategy depends on asset type (qualified vs. non-qualified), age, health, and whether a single contract or a coordinated two-contract structure is preferred. The table below maps the four main approaches.
| Strategy | How It Works | Tax on Premium Payments | LTC Benefits Tax Treatment | Best Fit |
|---|---|---|---|---|
| 1. Direct IRA/401k distributions → Traditional LTC premiums | Take annual distributions from the qualified account; use the after-tax proceeds to pay LTC insurance premiums directly | Fully taxable as ordinary income in year distributed; premium itself is not tax-deductible unless qualified under IRC §213 medical expense deduction rules | Tax-free when paid for qualified LTC services from a policy meeting 7702B requirements | Simpler structure; annual premiums are manageable amounts; appropriate for traditional standalone LTC policies |
| 2. IRA → Qualified annuity (10-year distribution) → Hybrid life/LTC policy | IRA transferred to qualified annuity; annuity distributes ~1/10 per year for 10 years; each distribution funds the hybrid life/LTC premium | Each annual distribution from annuity to fund LTC premium is fully taxable as ordinary income; the advantage is spreading $200,000 in distributions over 10 years instead of in one year | Tax-free when LTC benefits are received from a policy meeting 7702B requirements; death benefit is income tax-free to beneficiaries | Larger qualified balances ($150,000+); bracket management is a priority; leverage desired; “use it or lose it” concern with traditional LTC policies |
| 3. IRA → Annuity with built-in LTC benefits (combined contract) | IRA rolled into an annuity contract that includes LTC benefit provisions within the same policy; annual distributions satisfy the LTC funding | Annual annuity distributions are taxable as ordinary income; simpler administration because the LTC benefits and annuity are in a single contract | LTC benefits are typically tax-free under qualifying contracts; annuity death benefit subject to income tax on the pre-tax gain | Preference for a single-contract solution; qualified annuities that include LTC riders or built-in benefits; slightly lower administrative complexity |
| 4. Non-qualified assets → Section 1035 exchange → Hybrid LTC policy (for comparison) | Existing non-qualified annuity or life insurance cash value exchanged directly into a hybrid LTC policy using a tax-free 1035 exchange under IRC §1035 as amended by the Pension Protection Act of 2006 | Tax-deferred — gain in the existing policy is NOT taxable at the time of exchange; this is the genuinely tax-free repositioning path | LTC benefits are tax-free under qualifying policy; the exchange eliminates the gain that would have been taxable on surrender | Existing non-qualified annuity or life insurance with accumulated gain that is no longer needed for its original purpose; NOT applicable to IRA/401k money |
The SECURE 2.0 Change — Penalty-Free LTC Distributions Starting in 2026
The most significant recent development for qualified funds and long-term care planning is Section 334 of the SECURE 2.0 Act of 2022, which took effect for distributions made after December 29, 2025. This provision creates a new category of qualified long-term care distributions from employer retirement plans — specifically allowing individuals under age 59½ to take a limited distribution to pay premiums on a tax-qualified long-term care insurance policy without the standard 10% early withdrawal penalty under IRC §72(t). The distribution is still taxable as ordinary income; the rule waives only the additional 10% penalty that would normally apply to distributions taken before age 59½. The practical impact is most meaningful for pre-retirees in their 50s who have LTC planning needs but previously faced the penalty cost as a deterrent to using retirement account funds for LTC premiums. As of this writing, IRS guidance has not yet confirmed whether traditional IRAs qualify under this rule in addition to employer-sponsored plans like 401(k)s. Anyone evaluating this new provision should confirm the current IRS guidance before relying on it in plan design. Our resources on required minimum distributions and RMDs after SECURE 2.0 cover the full SECURE 2.0 distribution rule landscape.
The 10-Year IRA Distribution Strategy — How It Works in Detail
The three-part strategy that forms the core of this page is specific enough in its mechanics that understanding each step is essential before evaluating whether it is appropriate for a given situation. Step one is the IRA transfer: a portion of the existing IRA balance — typically $100,000 to $300,000 depending on the funding need — is transferred to a new tax-qualified annuity through a direct IRA-to-IRA rollover. This transfer is tax-free in itself; the funds retain their qualified status inside the new annuity. The annuity is structured with an income distribution design — either an income rider or a systematic withdrawal plan — that distributes approximately one-tenth of the annuity value annually for ten years. Our resource on how to transfer an IRA to an annuity covers the transfer mechanics, and our resource on how to transfer a retirement account to an annuity covers the broader rollover process.
Step two is the annual distribution: each year for ten years, the annuity distributes the calculated annual amount. Each distribution is a taxable event — a 1099-R is issued and the full distribution amount is included in ordinary income for that year. The critical tax planning advantage is that instead of taking $200,000 out of an IRA in a single year — which could push a significant portion into the 32% or 37% federal tax brackets — the strategy spreads $200,000 in distributions across ten years at approximately $20,000 per year. At current tax rates, $20,000 per year may land in a significantly lower marginal bracket than a lump-sum $200,000 distribution. The predictability of the annual distribution amount also allows for coordinated tax planning with other income sources — Social Security, pension, annuity income, and other distributions. Our resource on how annuities are taxed and our resource on laddering annuities cover adjacent strategies for managing qualified distributions in retirement. Our resource on annuity exclusion ratio covers the specific calculation relevant to non-qualified annuity distributions for contrast.
Step three is the hybrid life/LTC policy: each annual distribution funds the premium payment on a life insurance policy with long-term care benefits. This product — covered in our resource on hybrid life insurance with long-term care benefits — provides two possible outcomes: if qualifying long-term care is eventually needed, the policy pays a tax-free LTC benefit, typically at a significantly higher amount than the total premiums paid; if care is never needed, the policy pays a tax-free life insurance death benefit to beneficiaries. This dual-outcome structure is the specific reason many families find the hybrid structure preferable to traditional standalone LTC policies, which pay benefits only if care is used. Our resource on understanding hybrid long-term care insurance covers the product design, and our resource on hybrid long-term care overview covers the full landscape of hybrid product options.
The Single-Contract Alternative — Annuity With LTC Benefits
Not every qualified funds LTC strategy requires two separate contracts. Some product structures combine the annuity and the long-term care benefit in a single contract — a fixed annuity with built-in LTC benefit provisions that activates when the owner meets the qualifying criteria for LTC services. In these designs, the IRA is rolled into the combined contract, the annuity provides the accumulation and income component, and the LTC benefit layer provides the care cost coverage. Our resource on annuity with long-term care benefits covers this combined product structure, and our resource on fixed annuity with long-term care benefits covers the fixed annuity version specifically. Our resource on non-qualified long-term care annuity covers the annuity-based LTC structure funded with non-qualified assets. The single-contract approach simplifies administration and underwriting compared to the two-contract design, though the leverage potential and benefit design may differ.
Tax Advantages at Both Ends — The Payoff Structure
The structured qualified-funds LTC strategy converts a fully taxable retirement asset into a product whose benefits are paid tax-free. The premiums paid with the IRA distributions are taxable — that cannot be avoided with qualified money. But the LTC benefits received when care is eventually needed are income-tax free under Section 7702B of the Internal Revenue Code, which governs qualified long-term care insurance. A $200,000 IRA that is distributed as $20,000 per year over ten years — all taxable — and converted into a hybrid life/LTC policy that provides $400,000 or more in available LTC benefits — all tax-free — has accomplished a structural transformation of a fully taxable asset into a leveraged, tax-advantaged benefit pool. Our resources on tax advantages of long-term care insurance and hybrid policies, are long-term care benefits taxable, and tax-free long-term care insurance cover the federal tax treatment of LTC benefits in detail. Our resource on partnership qualified long-term care insurance covers the additional Medicaid asset protection benefit available in LTC Partnership states for policies that meet qualification requirements. Our resource on Roth conversion strategies covers the alternative approach for families considering repositioning IRA dollars into tax-free status through a different mechanism.
Self-Funding vs. The Structured Strategy — What the Numbers Look Like
The alternative to a structured qualified-funds LTC strategy is self-funding — keeping the IRA invested and planning to cover long-term care costs from portfolio distributions as they occur. Our resource on self-insured long-term care covers the self-funding analysis in detail. The self-funding approach has real advantages: full liquidity, investment return potential, and no underwriting requirement. The structural vulnerability is the same one that affects all uninsured long-term care plans: the magnitude and duration of the care event is unknown at the time the decision is made. A 90-day home care episode is manageable for most well-funded retirees. A five-year progressive dementia care sequence that runs $90,000 annually in today’s dollars — $450,000 cumulative before inflation — is a different financial outcome entirely. For a couple, the risk compounds: both spouses may require extended care at different times, with the second care episode often occurring when the surviving spouse’s financial resources have already been diminished by the first. Our resource on long-term care insurance for couples covers the couple-specific planning framework. Our resource on long-term care planning strategies covers the full planning landscape including self-funding analysis, hybrid products, and traditional LTC in the same framework. Our resources on how much long-term care insurance costs and long-term care insurance services provide the starting point for cost and coverage comparisons.
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FAQs: Using Qualified Funds for Long-Term Care Insurance
Can you use IRA or 401k money to pay for long-term care insurance tax-free?
No — not for qualified (pre-tax) retirement accounts. Every distribution from a traditional IRA, 401(k), or other pre-tax qualified account is taxable as ordinary income in the year received, regardless of what it is used for. Using those funds to pay LTC insurance premiums does not create a tax deduction or exclusion that eliminates the income tax. What structured strategies accomplish is tax timing — spreading distributions over 10 years rather than taking a large lump sum, which can result in lower average marginal rates. The LTC benefits received if care is eventually needed are a different story — those are generally income-tax free from a qualified LTC policy.
What is the SECURE 2.0 penalty-free LTC distribution rule?
Section 334 of SECURE 2.0 created a new category of qualified long-term care distributions effective for distributions made after December 29, 2025. Under this rule, individuals under age 59½ may take a limited distribution from an eligible employer retirement plan to pay premiums on a tax-qualified long-term care insurance policy without incurring the standard 10% early withdrawal penalty under IRC §72(t). The distribution is still fully taxable as ordinary income — only the additional 10% penalty is waived. As of this writing, whether IRAs are covered under this rule is pending final IRS guidance. This is a meaningful new planning tool for pre-retirees with LTC planning needs who previously faced the penalty cost as a barrier to using retirement funds for LTC premiums.
How does the 10-year IRA distribution strategy for LTC work?
The strategy involves three steps: first, transferring a portion of the IRA into a tax-qualified annuity through a direct rollover (no tax at this step); second, structuring the annuity to distribute approximately one-tenth of the balance annually for 10 years (each annual distribution is taxable as ordinary income); third, using each annual distribution to fund a life insurance policy with long-term care benefits (the premiums convert taxable distributions into leveraged, dual-purpose protection). The advantage over a lump-sum approach is tax spreading — distributing $200,000 as $20,000/year over 10 years at lower marginal rates than distributing $200,000 in a single year. If care is eventually needed, the LTC benefits are tax-free. If care is never needed, the death benefit is income-tax-free to beneficiaries.
What is a 1035 exchange and can it be used for long-term care insurance?
A Section 1035 exchange is a tax-free transfer of certain insurance contracts — life insurance or non-qualified annuities — into a new insurance or annuity product. The Pension Protection Act of 2006 expanded 1035 exchange rules to permit tax-free exchanges from life insurance or non-qualified annuity policies into qualified long-term care insurance policies or hybrid life/LTC policies. This is the genuinely tax-free repositioning path for LTC funding. Critically, 1035 exchanges apply to non-qualified assets only — existing non-qualified annuities with accumulated gain or life insurance cash value. A traditional IRA or 401(k) is a qualified account and cannot be repositioned via a 1035 exchange. The two strategies serve different asset types and should not be confused.
Are long-term care insurance benefits taxable even when funded with IRA money?
No — LTC benefits paid by a policy that meets the requirements of a qualified long-term care insurance contract under IRC §7702B are generally income-tax free regardless of how the premiums were funded. Even though the IRA distributions used to pay premiums were taxable as ordinary income, the LTC benefits received if qualifying care is eventually needed are paid on an income-tax-free basis. This creates the structural conversion that makes the strategy attractive: taxable IRA dollars converted via a taxable premium stream into a tax-free benefit pool. The tax is paid on the way in (the annual distributions used as premiums), not on the way out (the LTC benefits). The same tax-free treatment applies to the life insurance death benefit if care is never used.
Who is the best candidate for the IRA-to-LTC structured funding strategy?
The strategy is generally most compelling for individuals who are: over age 59½ (no early withdrawal penalty concern), have a significant IRA or qualified balance they do not need for immediate income, face RMD pressure that will generate taxable distributions regardless of whether they have a LTC plan in place, are concerned about the financial risk of extended care and prefer leveraged protection over self-funding, and can pass the health underwriting required for the life insurance portion. Health underwriting is a requirement — not everyone will qualify for the hybrid life/LTC policy, and health conditions that have emerged since a prior evaluation may change eligibility. A detailed case design review that covers tax bracket projections, health picture, LTC funding need, and retirement income context is the necessary starting point.
About the Author:
Jason Stolz, CLTC, CRPC, DIA, CAA and Chief Underwriter at Diversified Insurance Brokers (NPN 20471358), is a senior insurance and retirement professional with more than 25 years of real-world experience helping individuals, families, and business owners protect their income, assets, and long-term financial stability. As a long-time partner of the nationally licensed independent agency Diversified Insurance Brokers, Jason provides trusted guidance across multiple specialties—including fixed and indexed annuities, long-term care planning, personal and business disability insurance, life insurance solutions, Group Health, and short-term health coverage. Diversified Insurance Brokers maintains active contracts with over 100 highly rated insurance carriers, ensuring clients have access to a broad and competitive marketplace.
His practical, education-first approach has earned recognition in publications such as VoyageATL, as well as his agency's featured coverage in Kiplinger— highlighting his commitment to financial clarity and client-focused planning. Drawing on deep product knowledge and years of hands-on field experience, Jason helps clients evaluate carriers, compare strategies, and build retirement and protection plans that are both secure and cost-efficient. Visitors who want to explore current annuity rates and compare options across multiple insurers can also use this annuity quote and comparison tool.
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