Contributing to a health savings account or HSA before you retire can provide various benefits after you turn 65. These plans typically cover just qualified medical expenses, which can be reimbursed tax and penalty free. To determine how to maximize your distributions from your HSA, discuss your current retirement plans with your tax professional or CFP.
Eligibility for a Health Savings Account
You can continue your HSA contributions, including any catch-up if you are eligible. An important thing to consider is that once you are eligible for Medicare, you are not eligible to contribute to an HSA. However, any funds still in your account can reimburse qualified medical expenses and other expenses until the funds have been used up.
By electing to collect your Social Security benefits, you are typically ineligible for Medicare.
For those that choose not to enroll in Medicare, they maintain their eligibility to contribute and maintain an HSA. However, you need to keep in mind that Social Security typically enrolls you automatically in Medicare Part A.
For those who have turned 65 and elected to take their Social Security benefits and enroll in Medicare, a younger spouse who is still eligible to contribute to an HSA account must open their own HSA account because they are eligible and can make their full contributions, including any catch-up. However, they cannot make contributions into their spouse’s account.
The distributions after age 65 from an HSA account will be penalty-free, regardless of the reason for the distribution. However, they can also be tax-free if used to pay for a qualified medical expense. Any other withdrawals will be subject to standard income tax rates at the time of the withdrawal.
Thus, for many individuals, the HSA will provide the funds to pay for medical expenses not covered by Medicaid or their medical insurance.
An HSA can be used as an income source after you turn 65, but you will have to make income tax payments on the distributions. However, the benefit is that you can enjoy the additional supplemental income as needed for non-qualified expenses penalty-free. Therefore, you want to maximize your contributions to this fund and your IRA to maximize your potential return. Also, contribute any catch up contributions you may be eligible for.
If you qualify for an HSA, it is important to make sure that you are making your full contributions, including any catch-up to benefit from this savings option after you turn 65.
Another benefit of having a health savings account is that your premiums for Medicare parts A, B, D and any HMO premiums are eligible for a tax-free and penalty-free distribution. If your Medicare premium is deducted right from your Social Security benefits check, then you can reimburse yourself from the HSA for those premiums. If you are still working, then you can use your HSA to pay your share of the premiums or reimburse yourself for those premiums if they are currently being deducted from your payroll check.