How Medicare Will Impact Your HSA
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Contributing to a health savings account, or HSA, is one of the smartest moves you can make to prepare for retirement. HSA funds can be used at any age to pay for qualified medical expenses, and HSA withdrawals are always tax-free when used for eligible healthcare expenses.
Since healthcare tends to be a substantial retirement expense, it stands to reason that entering your golden years with a robust HSA balance could make your costs far more manageable. However, one thing you should know is that your ability to fund an HSA will change once you enroll in Medicare.
Medicare and HSAs
Medicare eligibility begins at age 65, though you can sign up for coverage up to three months before the month of your 65th birthday. Once you’re enrolled in Medicare, you can no longer contribute to an HSA. That’s because to qualify for an HSA, you must be on a high-deductible health plan as determined by IRS standards, but you can’t have an accompanying health plan, including Medicare.
Keep in mind that HSA contributions are barred even if you’re only enrolled in Medicare Part A. Some seniors who remain employed at 65 and continue receiving coverage under a group health plan at work sign up for Part A alone, since Part A doesn’t charge a premium and can be used as secondary insurance for hospital care. If you’re in this boat and are thinking of enrolling in Part A without Part B, know that HSA contributions will still be off limits, even if your insurance plan through work otherwise qualifies as a high-deductible health plan.
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Furthermore, if you’re planning to enroll in Medicare, you may want to halt HSA contributions six months prior to signing up. When you enroll in Part A, you can get up to six months of retroactive coverage dating back to your initial month of eligibility, and if you don’t stop funding your HSA in time, you’ll risk IRS penalties.
Finally, once you start receiving Social Security benefits, you’ll be automatically enrolled in Medicare Part A, which means HSA contributions are off the table. You can begin collecting Social Security as early as age 62.
Using an HSA Once on Medicare
Though you can’t fund an HSA while enrolled in Medicare, the money in that account is still yours to spend. You can withdraw it tax-free to cover qualified healthcare expenses during retirement, which include Medicare premiums, deductibles, and copays. Furthermore, once you turn 65, you can actually withdraw HSA funds for any purpose and avoid the 20% penalty that otherwise applies to younger account holders who take withdrawals for non-qualified purposes. However, if you take a non-medical withdrawal at age 65 or older, you will be liable for taxes on the sum you remove.
Since you can’t put more money into an HSA once you sign up for Medicare, it pays to contribute as much to that account as possible in the years leading up to retirement. That way, you’ll have a means of covering your healthcare expenses when and if money becomes tighter.