The Core Rule: Medicare Ends Contributions
An HSA is a triple tax-advantaged account for those with High Deductible Health Plans (HDHPs) to save for healthcare costs. You cannot contribute to an HSA while enrolled in any part of Medicare. The IRS states that to contribute to an HSA, you cannot be enrolled in Medicare.
Turning 65 often triggers this rule, especially if you start collecting Social Security, which leads to automatic enrollment in Medicare Part A. This automatic enrollment stops your eligibility to make new HSA contributions. You can keep and use the account, but new funds cannot be added once you are on Medicare.
Using an Existing HSA in Retirement
Retirees with existing HSA funds can still utilize this valuable asset. The money is yours for life and remains with you after retirement or Medicare enrollment. While new contributions are not allowed, the balance can be used for qualified medical expenses, tax-free.
Existing HSA funds can cover various medical costs in retirement, including:
- Medicare deductibles, copayments, and coinsurance.
- Premiums for Medicare Part A (if applicable), Part B, Part D, and Medicare Advantage plans.
- Certain long-term care insurance premiums.
- Dental, vision, and hearing expenses.
HSA funds cannot be used tax-free for Medicare Supplement (Medigap) policy premiums.
The HSA as a Post-65 Retirement Account
HSAs can function as a supplemental retirement account after age 65 due to changes in withdrawal rules.
Withdrawals After Age 65
- Qualified Medical Expenses: Remain tax-free withdrawals.
- Non-Medical Expenses: Can be withdrawn without the 20% penalty, but are taxed as ordinary income, similar to traditional retirement accounts. This adds flexibility for any retirement expense.
Comparison of HSA Rules
| Feature | Before Age 65 & Not on Medicare | After Age 65 & on Medicare |
|---|---|---|
| Contribution Eligibility | Yes, if covered by an HDHP | No, contributions must stop |
| Contributions Allowed | Up to annual IRS limit + $1,000 catch-up for 55+ | No |
| Tax on Contributions | Tax-deductible or pre-tax | Not applicable |
| Tax-Free Growth | Yes | Yes |
| Withdrawals for Qualified Medical Expenses | Tax-free | Tax-free |
| Withdrawals for Non-Medical Expenses | Taxed as income + 20% penalty | Taxed as income, no penalty |
| Portability | Yes | Yes |
Planning for a Smooth Transition to Medicare
Careful planning is needed when moving to Medicare to avoid tax penalties. Medicare Part A coverage can be retroactive up to six months. To prevent penalties on excess contributions, stop HSA contributions at least six months before your Medicare enrollment begins.
Starting Social Security benefits at or after 65 results in automatic Medicare Part A enrollment. If you want to contribute to an HSA past age 65, you must decline Medicare enrollment and delay Social Security benefits.
Maximizing Your HSA as a Retirement Asset
For those with substantial HSA balances, a strategic approach can maximize its value in retirement. Consider paying for smaller current medical expenses out-of-pocket and saving receipts. HSA reimbursements have no time limit, allowing funds to grow tax-free. You can then reimburse yourself later for past expenses, creating a tax-free income stream in retirement.
For more details on HSA tax rules, refer to IRS Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans.
Conclusion
A retired person can have an HSA, and it remains valuable for managing retirement healthcare costs. While contributions stop upon Medicare enrollment, existing funds are tax-free for qualified medical expenses, including some Medicare premiums. After 65, the HSA offers flexibility for non-medical withdrawals, taxed only as ordinary income. Understanding these rules helps retirees use their HSA to enhance financial security.
