Health savings accounts (HSAs) provide a tax-advantaged way to pay for medical expenses. But once you enroll in Medicare, contributions must stop. You can still use existing funds in the account. Though, to avoid tax penalties, you should plan to stop contributions at least six months before enrolling in Medicare due to retroactive coverage. Even without new contributions, your HSA remains a valuable tool for healthcare expenses in retirement.
A financial advisor can help you make the most of your HSA through contribution strategies, tax benefits and retirement planning.
What to Know About Using an HSA While on Medicare
Once you enroll in Medicare, your ability to use a HSA changes. Though you can no longer contribute to your HSA once you’re on Medicare, the good news is that you can still use the funds in your account.
These savings can help cover a range of qualified medical expenses, including Medicare premiums, deductibles and other healthcare costs. While your HSA can still be used to pay for Medicare premiums, including those for Part B, Part D and Medicare Advantage plans, they cannot be used to pay for Medigap (Medicare Supplement Insurance) premiums. Using HSA funds for other qualified medical expenses, like deductibles and copayments, remains tax-free.
After age 65, you can also use your HSA funds for non-medical expenses without facing a penalty, but the withdrawals will be taxed as ordinary income. This makes it beneficial to use your HSA primarily for medical costs to take advantage of its tax-free benefits.
Planning your Medicare enrollment and HSA usage carefully can help you maximize the benefits of both. If you plan to enroll in Medicare, it’s important to stop HSA contributions up to six months before enrolling to avoid penalties. This is due to the fact that if you are six months beyond your full retirement age when you sign up, you will receive six months of retirement benefit backpay, effectively backdating your enrollment as well.
On the other hand, if you’re delaying Medicare enrollment and maintaining a high-deductible health plan, you can keep contributing to your HSA until you enroll in Medicare. Once you do enroll, contributions must stop, but the HSA funds you’ve already saved can still be used for qualified expenses without penalty.
When You Can Face a Penalty While Enrolled in Medicare
When you enroll in Medicare, you can no longer contribute to your HSA, and continuing to do so can result in penalties. If you make contributions after your Medicare enrollment date, you could face a tax penalty of 6% on the excess contributions, as well as any interest those contributions accrue before they are removed from your account. To avoid these penalties, it’s important to stop contributions once you’re enrolled in any part of Medicare.
That said, you will not face a penalty for using the funds already in your HSA after enrolling in Medicare. You can still use these funds to pay for qualified medical expenses. If you use your HSA funds for non-medical expenses after age 65 (some people enroll in medicare before age 65), you won’t face an additional penalty, but the withdrawals will be taxed as ordinary income tax rates. This applies to anyone over the age of 65, whether or not they are enrolled in Medicare.
Finally, plan your Medicare enrollment and HSA contributions carefully. If you delay enrolling in Medicare and remain eligible for an HSA, you can continue making contributions, but at least six months prior to enrollment, contributions typically must stop to avoid penalties.
What an HSA Can Pay for When Enrolled in Medicare
When you are enrolled in Medicare, you can use your HSA to pay for a variety of qualified medical expenses. These include Medicare premiums for Part B, Part D and Medicare Advantage plans. However, you cannot use HSA funds to pay for Medigap premiums.
You can also use your HSA to cover out-of-pocket medical costs such as copayments, deductibles and coinsurance for Medicare services. This helps reduce the financial burden of healthcare expenses that are not fully covered by Medicare.
HSA funds also can be used for services that Medicare doesn’t typically cover, like dental care, vision services and hearing aids. These expenses are considered qualified medical costs and can be paid for with tax-free HSA withdrawals.
Bottom Line
While you can no longer contribute to an HSA after enrolling in Medicare, you can still use the funds already in your account to cover qualified medical expenses, including Medicare premiums, deductibles and other out-of-pocket healthcare costs. This flexibility allows your HSA to continue serving as a valuable tool in managing healthcare expenses during retirement. However, it’s important to stop making contributions before enrolling in Medicare to avoid potential tax penalties.
Healthcare Planning Tips
- A financial advisor can help invest HSA funds to grow savings for future healthcare costs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to protect your retirement savings from future healthcare costs, consider getting long-term care insurance to cover the costs of custodial and personal care in case of a long debilitating illness.
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