Using Retirement Accounts (IRA, 401k) to Pay for Senior Care

Your IRA and 401(k) can pay for senior care, and for most families a retirement account is the biggest pool of money they have. But using that money has tax consequences, and a careless withdrawal can cost you more than the care itself.1

This guide covers how withdrawals are taxed, the early-withdrawal penalty and the exceptions that matter for care, the required distributions that start at 73, and how to take the money out without triggering a tax spike.

Using a Retirement Account to Pay for Senior Care: 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. Distributions are taxed as ordinary income in the year you take them, though not all of a distribution is taxable if you made nondeductible (after-tax) contributions.1 Withdraw $50,000 to cover a year of assisted living, and that $50,000 lands on your tax return as income.

Roth IRA. You already paid tax on this money, so qualified distributions come out tax-free.1 To be qualified, a distribution must come after the 5-year period that begins with the first tax year a contribution was made to a Roth IRA set up for you, and it must be made on or after the date you reach 59 1/2, because you are disabled, to a beneficiary or your estate after your death, or for a first home.1 When both conditions are met, the money is yours with no further tax.

If you can't take a qualified distribution yet, you are not locked out. A return of your regular contributions is not included in your income either, and the IRS treats a Roth IRA's money as coming out in a set order: regular contributions first, then conversion and rollover contributions, then earnings. So you can take back what you put in as regular contributions tax-free. Go past that, and part of a non-qualified distribution may be taxable and may also be subject to the 10% additional tax covered below.1 You report Roth distributions and any after-tax basis on IRS Form 8606, About Form 8606.

That difference is the whole game. A qualified Roth distribution, or a return of your regular contributions, 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 qualified Roth distributions and returns of your regular contributions 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 qualified retirement plan before age 59 1/2, and your tax normally goes up by 10% of the part that counts as income, on top of the regular income tax.1 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.

The tax code lists a long set of exceptions, and four of them bear on paying for care.

Unreimbursed medical expenses above 7.5% of your AGI. If you have medical costs that insurance didn't cover, a withdrawal is exempt from the 10% penalty up to the amount of those costs above 7.5% of your adjusted gross income.1 You do not have to itemize deductions to use this one, so it works even if you take the standard deduction. 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.

Disability, under a strict test. A withdrawal because the account owner is disabled is exempt, but disabled here means unable to engage in any substantial gainful activity because of a medically determinable physical or mental impairment expected to result in death or to last a long and indefinite time, with proof the IRS requires.1 Needing assisted living is not the same thing, and someone who still works does not meet it. Take the withdrawal on a looser reading and you can owe the 10% anyway.

Terminal illness. Withdrawals by an account owner whose terminal illness a physician has certified are exempt from the date of that certification. This exception uses the tax code's terminal-illness definition with 84 months in place of the usual 24, a much longer window than the ordinary test, and you have to give sufficient evidence to the plan administrator.1

Long-term care insurance premiums from a workplace plan. For distributions made after December 29, 2025, a defined contribution plan such as a 401(k) (not an IRA) is permitted to allow qualified long-term care distributions, and those distributions escape the 10% penalty. The exception reaches you only if your workplace plan allows them. Each one is capped at the least of what you paid that year for certified long-term care insurance for yourself or your spouse, 10% of your vested plan balance, and a $2,500 base amount that is indexed for inflation. The policy must be certified coverage, a premium statement from the insurer must be filed with the plan, and coverage for a spouse works only on a joint return.1 This pays insurance premiums. It is not a penalty-free way to pay a nursing home bill.

None of these exceptions erases the income tax. They only remove the 10% penalty.1 And once you turn 59 1/2, the penalty disappears for everyone, so this only matters for early withdrawals. To claim an exception, file IRS Form 5329, About Form 5329, with your tax return and enter the exception code for your situation.

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.

RMDs from traditional IRA, SEP IRA, SIMPLE IRA and retirement plan accounts generally must begin at age 73. If you are still working, a workplace plan such as a 401(k) generally lets you delay RMDs until the year you retire, unless you own 5% of the business sponsoring the plan.1 Each year after that, you have to withdraw at least a minimum based on your account balance and life expectancy. Miss the full amount by the due date, and what you did not withdraw may be subject to a 25% excise tax, or 10% if you correct it in time within two years.1

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 and designated Roth accounts don't require withdrawals until after the owner's death, 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 income-related monthly adjustment amount (IRMAA) threshold.1

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.1
• Raise your Medicare premiums. Your Part B monthly premium is based on income, so a higher modified adjusted gross income can add an income-related monthly adjustment amount (IRMAA) on top of the standard premium.1

The fix is usually simple: spread the withdrawals across multiple tax years instead of taking one big distribution.1 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. Because your Medicare Part B premium is based on income, a large withdrawal can raise what you pay for Medicare, and that is far easier to plan around before the money leaves the account than after. The cost of good advice is small next to a bracket jump or a higher premium.

Will Using a Retirement Account to Pay for Senior Care Affect Medicaid?

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.

None of the federal tax rules above decides how an IRA or 401(k) counts for Medicaid eligibility. That is determined under each state's Medicaid rules, and it varies by state.1 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.

Your Next Step

Before you move a large sum, take the numbers to a tax professional. A large withdrawal can raise your Medicare Part B premium, so the time to plan is before the money leaves the account.1 If you are under 59 1/2 and an exception applies, file IRS Form 5329 to claim it. For Roth distributions and after-tax basis, use IRS Form 8606.

To find local help planning and paying for care, contact the Eldercare Locator, the Administration for Community Living's free national referral service, at 1-800-677-1116.

Learn More

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.