Here Is How Seniors Benefit from HSAs

Healthcare is an enormous expense for working Americans and seniors alike, but it can be particularly burdensome for retirees on a fixed income. Thankfully, there are steps you can take during your working years to make healthcare more affordable during your golden years, and one important step to consider is funding a health savings account, or HSA.

How Does a Health Savings Account Work?

Here’s how HSAs work: You contribute a certain amount of money annually, up to the limit the IRS sets, and those funds go into your account on a pre-tax basis. You can then withdraw as needed to cover immediate medical expenses, or you can carry funds you don’t need right away to future years to cover healthcare costs down the line, such as in retirement. Your balance can be invested so it grows into a larger sum, and any gains in your account are yours to keep tax-free. Withdrawals are also tax-free, provided they’re used to pay for qualified medical expenses.

If you have the ability to contribute to an HSA during your working years, capitalize on that option. Having an HSA available in retirement could be a financial lifesaver.

How an HSA Can Help Your Retirement

Once you get on Medicare, you can no longer continue to fund an HSA. However, if you have an existing HSA prior to retirement, that money is yours to use regardless of whether you’re enrolled in Medicare or not.

During retirement, you can use your HSA as a dedicated means of covering your healthcare expenses. These include Medicare premiums, deductibles, and copays. You can also use HSA funds to cover the cost of long-term care insurance premiums.*

Furthermore, once you turn 65, you get a lot more flexibility with your HSA. If you remove funds from an HSA for non-qualified purposes prior to the age of 65, you’ll not only be taxed on your withdrawals, but you’ll also be subject to a 20% penalty. However, if you’re at least 65, you’re allowed to withdraw funds from your HSA for any purpose without penalty, which means you can use that money to cover any number of expenses that pop up during retirement. The only catch is that non-medical withdrawals at age 65 or older will be subject to taxes, just as you’d pay taxes on withdrawals from a traditional IRA or 401(k).**

Funding an HSA

To contribute, you must be on a high-deductible health plan. This doesn’t just mean having to fork over a large wad of cash before your insurer pays for your medical services; it means your plan must conform to strict IRS guidelines regarding deductibles and out-of-pocket maximums. These rules can change from year to year, so it pays to see if you’re eligible for an HSA, even if you’ve been barred from contributing in the past. If you do fund an HSA and carry the bulk of that money into retirement, you’ll have one less whopping expense to worry about when you’re older.

Maurie Backman has been writing about personal finance and healthcare for well over a decade. Her articles have appeared on The Motley Fool, CNN Business, USA Today, and MSN. Maurie is a Binghamton University graduate who enjoys reading, hiking, watching hockey, and rejoicing in the fact that her creative writing degree actually amounted to something.

* Anonymous (2019). Health Savings Accounts (HSAs) and Medicare. Medicare Interactive. Retrieved November, 2019
** Anonymous, (2019). Does Medicare Enrollment Impact My HSA Eligibility? and Other HSA Questions. DataPath. Retrieved November, 2019