Strategies to optimize your healthcare savings at every stage

Key Takeaways:
  • HSAs offer tax advantages for medical expenses, but contributions must stop once you enroll in Medicare at age 65.
  • After 65, you can use HSA funds for non-medical expenses without a penalty, though withdrawals will be taxed as ordinary income.
  • Strategic planning before Medicare enrollment can maximize HSA benefits and support a well-rounded retirement strategy.

 

Health Savings Accounts (HSAs) are a popular and tax-efficient tool for managing healthcare expenses, especially for those with high-deductible health plans (HDHPs). However, the rules governing HSAs change significantly once you reach age 65. Navigating the benefits and restrictions on HSAs pre and post age 65 are important to secure your financial future.

What is an HSA?

An HSA is a tax-advantaged savings account designed to help you pay for qualified medical expenses. Contributions are tax-deductible, funds grow tax-free and withdrawals for qualified medical expenses are also tax-free. HSAs can be a powerful part of a comprehensive financial plan, especially for individuals looking to save for healthcare costs in retirement.

ELIGIBILITY TO CONTRIBUTE

  • Before Age 65: To contribute to an HSA, you must be covered by an HDHP and not enrolled in Medicare. Contributions can be made by you, your employer or any other person on your behalf.
  • After age 65: Once you enroll in Medicare, you are no longer eligible to contribute to an HSA. This is because Medicare enrollment disqualifies you from being considered an “eligible individual” under IRS rules. However, you can still use the funds already in your HSA.

USE OF FUNDS

  • Before Age 65: Distributions from an HSA used exclusively to pay for qualified medical expenses are excludable from gross income. Non-qualified distributions are subject to income tax and an additional 20% penalty tax.
  • After Age 65: Distributions used for non-qualified medical expenses are still subject to income tax but are no longer subject to the 20% penalty tax. This makes HSAs more flexible for retirees, as you can use the funds for any purpose without incurring the penalty, although the distributions will be taxed as ordinary income.

QUALIFIED MEDICAL EXPENSES

  • Before Age 65: Qualified medical expenses include a wide range of medical costs as defined in IRS Section 213(d). Generally, health insurance premiums are excluded except for specific cases like COBRA continuation coverage, long-term care insurance and health care coverage while receiving unemployment compensation.
  • After Age 65: In addition to the pre-65 qualified medical expenses, premiums for Medicare Part A, Part B, Part D and Medicare Advantage plans become qualified medical expenses. However, premiums for Medigap policies are not considered qualified medical expenses.

CATCH-UP CONTRIBUTIONS

  • Before Age 65: Individuals aged 55 and older can make additional “catch-up” contributions to their HSA. In 2025, the catch-up contribution limit is $1,000.
  • After Age 65: Once you enroll in Medicare, you can no longer make any contributions, including catch-up contributions, to your HSA.

MEDICARE ENROLLMENT

  • Before Age 65: If you are eligible for Medicare but not yet enrolled, you can still contribute to an HSA. Eligibility for Medicare does not disqualify you from contributing to an HSA; actual enrollment does.
  • After Age 65: Enrollment in Medicare disqualifies you from contributing to an HSA. This includes enrollment in any part of Medicare, such as Part A or Part B.

Questions?

Navigating the rules of HSAs before and after age 65 is important for maximizing their benefits. By contributing strategically before Medicare enrollment and understanding the flexibility of post-65 withdrawals, you can integrate HSAs into a comprehensive retirement plan. To make the most of your HSA, consult an Adams Brown advisor who can guide you through the complexities and ensure your financial future is secure.