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Life Health > Long-Term Care Planning

Debate: Will Secure 2.0 Act Help Americans Pay for Long-Term Care?

By Robert Bloink By William H. Byrnes

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One new provision in the recently enacted Secure 2.0 Act will allow taxpayers to withdraw up to $2,500 each year from a traditional retirement plan to cover the costs of long-term care insurance without triggering the 10% early withdrawal penalty.

These withdrawals will still be subject to ordinary income taxation. The funds can be used to pay for standalone long-term care insurance or for certain life insurance or annuity contracts that also provide for meaningful financial assistance if the insured person requires long-term care in a nursing home or home-based long-term care.

This new provision is effective for tax years beginning after Dec. 31, 2024 (the $2,500 annual limit will also be adjusted for inflation in later years).

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the Secure Act 2.0’s new provision allowing penalty-free withdrawals to cover long-term care insurance costs.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Thumbs down Bloink
thumbs up Byrnes

Their Reasons:

Byrnes: Countless Americans are struggling with the burden of determining how to pay for long-term care insurance, which is itself prohibitively expensive for most taxpayers in today’s marketplace. Allowing these Americans to access their hard-earned retirement funds to cover the cost of an expense that is likely to occur during retirement makes absolute sense.

Bloink: This new provision will do very little to encourage Americans to purchase long-term care insurance. First, it doesn’t become effective for another three years. Second, Americans who can afford the cost of coverage probably don’t need the incentive of a penalty-free withdrawal of $2,500 per year.

Furthermore, long-term care insurance is not popular. It tends to only benefit wealthy taxpayers who can both afford and qualify for the insurance. This new law will do very little to increase the popularity of the product and won’t do anything to help bring down the costs of sky-high LTCI premiums.

Byrnes: This provision will encourage Americans to take control of their own long-term care funding rather than planning to rely on government resources for expensive nursing care in the future. It will also draw attention to the issue itself and generate additional sales within the LTCI market.

Bloink: The law itself seems vague in that it only allows penalty-free withdrawals for long-term care protection that provides meaningful financial coverage. The term meaningful financial coverage has yet to be defined, leaving taxpayers to wonder whether their actual coverage will be considered qualified under the new law — and whether annuities or life insurance that offer LTCI riders will qualify.

Byrnes: The bottom line is that the government needed to do something to encourage Americans to take another look at purchasing a long-term care insurance policy. The buzz generated by this new law could give Americans an incentive to take a closer look at the issue, their own financial circumstances and risk factors.

Bloink: Sure, this new law may draw attention to the issue, which could allow more people to realize that they actually should address the possibility of the need for future care. Allowing the funds to be withdrawn tax-free would generate even more attention, however. All taxpayers are going to see here is that they’re still required to pay taxes on the funds and that this could end up costing them even more money.

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Robert Bloink

William H. Byrnes

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