Your IRA and 401(k) can pay for senior care. For most families, retirement accounts are the biggest pool of money they have. But pulling that money out has tax consequences, and a careless withdrawal can cost you more than the care itself.
This guide covers how withdrawals are taxed, the early-withdrawal penalty and the two exceptions that matter for care, the required distributions that start at 73, and how to take the money out without triggering a tax spike.
The Tax Hit
How much of a withdrawal you keep depends on what kind of account it's in.
Traditional IRA or 401(k). You never paid tax on this money going in, so you pay it coming out. Every dollar you withdraw is taxed as ordinary income in the year you take it. Withdraw $50,000 to cover a year of assisted living, and that $50,000 lands on your tax return as income.
Roth IRA or Roth 401(k). You already paid tax on this money, so qualified withdrawals come out tax-free. To be qualified, the account generally has to be open at least five years, and you have to be 59 1/2 or older, disabled, or meet another exception. When those conditions are met, the money is yours with no further tax.
That difference is the whole game. A Roth funds care without raising your taxable income. A traditional account funds care but adds to your income, which can ripple into other costs we cover below. The IRS lays out the rules in Publication 590-B.
If you have both kinds of accounts, the order you draw from them matters. Pulling from a Roth in a year when your income is already high keeps you out of a higher bracket, because Roth withdrawals don't add to your taxable income. In a low-income year, drawing from the traditional account first can make sense, since you have room in the lower brackets to absorb it. There's no one right order for everyone, which is why this is a question worth taking to a tax professional before you move large sums.
One more thing about traditional accounts: the tax is owed in the year you withdraw, not spread out. So a withdrawal that funds two years of care but is taken all at once is taxed all at once. Matching your withdrawals to the years you actually spend the money keeps the income, and the tax, in step with the bills.
Avoiding the Early-Withdrawal Penalty
Take money out of a retirement account before age 59 1/2, and the IRS normally adds a 10% penalty on top of the regular income tax. On a $40,000 withdrawal, that's an extra $4,000 gone before you've paid the income tax. For families paying for care while still under 59 1/2, that penalty stings.
Two exceptions are built for exactly this situation.
Unreimbursed medical expenses above 7.5% of your AGI. If you have medical costs that insurance didn't cover, the part of those costs above 7.5% of your adjusted gross income is exempt from the 10% penalty. Only the amount above the 7.5% floor escapes the penalty, and the regular income tax still applies. Many senior-care costs, including some long-term care, can count as qualifying medical expenses, but the rules are specific. Check IRS guidance or ask a tax professional which of your costs qualify.
Total and permanent disability. If the account owner is totally and permanently disabled, withdrawals are exempt from the 10% penalty entirely. The income tax still applies, but the penalty does not. The IRS sets the standard for what counts as totally and permanently disabled, and you'll need documentation.
Neither exception erases the income tax. They only remove the 10% penalty. And once you turn 59 1/2, the penalty disappears for everyone, so this only matters for early withdrawals.
When You Have to Take Money Out: RMDs
At some point the choice gets made for you. Traditional retirement accounts have required minimum distributions, or RMDs: a minimum amount you must withdraw each year once you reach a set age.
Under the SECURE 2.0 Act, RMDs now begin at age 73 (rising to 75 in 2033). Each year after that, you have to withdraw at least a minimum based on your account balance and life expectancy. Skip it, and the penalty is steep.
For a family paying for care, RMDs cut two ways. They force taxable money out of the account, which can help cover care costs you'd be paying anyway. But that same forced income raises your adjusted gross income, and as the next section explains, a higher AGI can quietly raise your other bills. Roth IRAs don't have RMDs during the owner's lifetime, which is one more reason a Roth is easier to manage in retirement.
If you're already taking RMDs and also need to fund care, count the RMD as part of what you're pulling out, not on top of it. The RMD is income you'll have anyway. Plan additional withdrawals around it so the two together don't push you into a higher bracket or past an IRMAA threshold.
Don't Trigger a Tax Spike
This is the mistake that costs families the most: pulling out one giant withdrawal to cover care, and watching it set off a chain of higher costs.
A large traditional withdrawal piles onto your income for that single year. That one spike can:
- Push you into a higher tax bracket, so the top of the withdrawal is taxed at a higher rate.
- Raise your Medicare premiums. Higher earners pay an income-related surcharge called IRMAA on Part B and Part D, and it's keyed to your income from two years earlier.
- Shrink income-based subsidies and tax credits you might otherwise qualify for.
The fix is usually simple: spread the withdrawals across multiple tax years instead of taking one big distribution. If care will cost $60,000 over two years, taking $30,000 in each year often keeps you in a lower bracket and below the IRMAA thresholds than taking $60,000 at once.
A tax professional can run the numbers for your situation before you withdraw. IRMAA is keyed to your income from two years earlier, so a withdrawal you make this year can raise your Medicare premiums two years out, after the chance to plan around it has passed. The cost of good advice is small next to a bracket jump or two years of higher premiums.
Medicaid and Your IRA
If you're thinking about Medicaid to help pay for long-term care, your retirement account needs separate thought. Medicaid has strict asset limits, and how it counts an IRA or 401(k) is not settled by one national rule.
Some states count a retirement account as an asset that has to be spent down. Others exempt it when it's in payout status, meaning you're taking regular distributions. This is decided under each state's Medicaid rules, not federal tax law. There's no single national answer, so you have to check your own state.
Because the stakes are high, get this right before you move money or apply. Our guide to Medicaid planning strategies covers how the spend-down works and how to protect assets without disqualifying yourself.
Frequently Asked Questions
If it's a traditional IRA or 401(k), yes. Every dollar you take out is taxed as ordinary income that year. If it's a Roth and the withdrawal is qualified (account open at least five years and you're 59 1/2 or older, disabled, or meet another exception), it comes out tax-free.
Sometimes. The penalty is waived for unreimbursed medical expenses above 7.5% of your adjusted gross income, and for the account owner's total and permanent disability. Both exceptions remove only the 10% penalty. You still owe regular income tax on the withdrawal.
At age 73 under the SECURE 2.0 Act, rising to 75 in 2033. Once you reach that age, you must withdraw a minimum amount from traditional accounts each year. Roth IRAs have no required distributions during the owner's lifetime.
A large withdrawal spikes your income for the year. That can push you into a higher tax bracket, raise your Medicare IRMAA surcharge, and cut income-based subsidies. Spreading withdrawals across several years usually keeps your income lower and your total cost down.
It depends on your state. Some states count a retirement account as a spend-down asset; others exempt it when it's in payout status. Medicaid asset rules are set state by state, so there's no national answer. Check your state's rules before you apply.
Learn More
- How to Pay for Senior Care
- How Long-Term Care Insurance Works
- How to Qualify for Medicaid Without Going Broke
Find personalized help deciding how to use your retirement savings for senior care at brevy.com.
The information on Brevy.com is for educational purposes only and is not a substitute for professional legal, financial, or medical advice. Rules vary by state and program and change frequently. Always verify with the relevant agency or a qualified professional. Brevy is not a law firm, financial advisor, or healthcare provider.