Health Savings Accounts, or HSAs, must be carefully coordinated with your enrollment in Medicare.

What are health savings accounts?

Health Savings Accounts, or HSAs, are medical savings accounts that are available to people enrolled in high-deductible health plans (HDHPs). HSAs are considered tax advantaged because deposits made to these accounts are exempt from federal income tax. The funds in HSAs will also grow, tax-free, “rolling over” to accumulate year to year. 

Perhaps the most attractive benefit of HSAs is that the account holder can make tax-free withdrawals for qualified medical expenses at any time. Once you turn 65, you’ll also be able to use those funds to cover other expenses without paying the standard 20% penalty. However, you will be responsible for the regular income taxes on those funds.

Am I eligible for an HSA?

In order to qualify for an HSA, you must be covered by a high-deductible health plan. You must also ensure that you are not enrolled in any other non-HDHP insurance. You can also lose your eligibility for an HSA if you have coverage from a Flexible Spending Account (FSA) or a Health Reimbursement Arrangement (HRA) through your employer or spouse.

If you are already enrolled in Medicare, you are not eligible to begin or make contributions to an HSA. If you were already enrolled in the HSA prior to signing up for Medicare, you can still withdraw funds from your existing account.

Contributing funds to an HSA

Making contributions to your HSA is as easy as making deposits to your regular savings account. You can ask your employer to contribute a set amount to your HSA via automatic deductions from each of your paychecks. Alternatively, you can log in to your online account to make one-time or recurring deposits.

You are likely to be the primary contributor to your HSA, but other people–like your employer or a family member–can also make deposits to your account. However, there is a limit to the amount of money that can be contributed to the account each year, regardless of who is making the deposits.

There is one notable exception to this rule. If you start or become eligible for an HSA account later in life, you do have the opportunity to deposit an additional $1,000 each year after you turn 55. These are called “catch-up” contributions. If your spouse is also 55 or older, they may establish their own HSA and make “catch-up” contributions to that separate account.

Withdrawing funds for qualified medical expenses

The funds in an HSA can be used to cover qualified medical expenses at any time without penalties or federal tax liability. There is also no “approval process” or gatekeeper involved when you use those funds to cover qualified medical costs. This puts you in the driver’s seat when it comes to the important decisions around your health care. 

What are qualified medical expenses?

In general, any costs related to preventing or alleviating a physical or mental illness is considered a qualified medical expense. The IRS provides a current list of these qualified expenses, as well as a list of ineligible expenses, in Publication 502, which is updated on a yearly basis.

As you’ll see, the range of covered expenses is fairly comprehensive. It includes everything from artificial limbs and teeth to wheelchairs, nursing services, and psychiatric care. You can also pay some Medicare premiums with these funds. Other health-related expenses that are not considered qualified medical expenses include hair transplants, weight-loss programs, and cosmetic surgery.

Withdrawing funds for non-medical expenses

Once you turn 65, you will also be able to use these funds to cover non-medical expenses without penalties. However, you will have to pay income taxes on those withdrawals.

If you decide to withdraw funds from your HSA for non-qualified medical expenses prior to turning 65, you will face a 20% penalty. This penalty is in addition to the regular income tax rate.

HSAs as retirement investment accounts

Many people have begun using their HSAs as a retirement account to cover other expenditures. This is because HSAs have multiple tax advantages. Additionally, funds withdrawn from an HSA for non-medical expenses after age 65 are taxed at your current income tax rate. However, HSAs are most valuable if used as they were originally intended—to maximize health care savings—rather than as a replacement for a more traditional retirement fund. This is because HSAs enable account owners to make tax-free withdrawals on qualified medical expenses. Of course, these are likely to increase as you get older and potentially face new health issues.

How do HSAs fit with other aspects of my retirement plan?

If you are enrolled in a HDHP and are eligible to contribute to an HSA, you’ll want to maximize your contributions before you turn 65 and become eligible for Medicare. Once you enroll in Medicare, you will no longer be permitted to make contributions to your HSA.

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