Retired? Use your HSA to cover Medicare payments

 
A patient waits at the front desk of a doctor’s office.

People may mistakenly believe that when they reach age 65 and sign up for Medicare, their days of paying for medical care are over. That’s not so. Medicare is not free, and unexpected illness can bring some hefty medical bills.

Contributing to a health savings account (HSA) before retirement is one way to help prepare for medical expenses in retirement. It’s like an IRA for medical care.

How can a health savings account help you pay medical expenses in retirement?

People covered by Medicare typically pay monthly premiums, deductibles and co-pays. If you’re on Medicare, you may have to pay out-of-pocket for items Medicare doesn’t cover, such as dental work, hearing aids and eyeglasses.

According to the IRS, health savings accounts (HSAs) can be used to pay for qualified medical expenses including prescriptions and premiums for medical coverage.1

Who can contribute to an HSA?

If you are covered by an eligible high-deductible health insurance plan (HDHP), are not enrolled in Medicare, and cannot be claimed by someone else as a dependent, you can have an HSA. The deductible for the HDHP must be at least $1,300 for an individual or $2,600 for a family, but many deductibles can be much higher.

The health plan can be through an employer or one you buy on your own. HSAs are portable, meaning they stay with you if you change employers or leave the work force.2 Some employers make contributions to their workers’ health savings accounts.

Once you sign up for Medicare, you can no longer contribute to an HSA. But if you retire before you reach Medicare eligibility at 65, you can still contribute to your health savings account.

How much can you save in your HSA?

You can save up to $3,450 for an individual and $6,900 for a family in 2018 (the amount rises with inflation). Those 55 and older can contribute an additional $1,000 per year.3

You can use that money to pay for qualified healthcare expenses during the year or you can save the money to use for qualified medical expenses in retirement.

What are the tax advantages of an HSA?

The money you put into your HSA is not taxed, so you save money when you contribute since the amount of your contribution is subtracted from your taxable income.

If you are already making maximum contributions to your IRA or 401(k), this allows you to make additional pre-tax contributions for healthcare expenses in retirement.

Once you meet your HDHP deductible, you can take money out at any time for eligible healthcare expenses, and won’t pay taxes on the money you withdraw.4

For example, if you paid cash for new prescription glasses, you can make a withdrawal to cover that expense without tax or penalty. Withdrawals for other reasons are taxed, and may incur a 20% tax penalty.5

Be sure to consult a financial advisor to see if an HSA is the right choice to help you pay for healthcare expenses in retirement.

Sources

  1. “Medical and Dental Expenses,” IRS.gov, last accessed April 20, 2018, https://www.irs.gov/pub/irs-pdf/p502.pdf, PDF opens new window
  2. “Health Savings Accounts and Other Tax-Favored Health Plans,” IRS.gov, last accessed April 20, 2018, https://www.irs.gov/pub/irs-pdf/p969.pdf, PDF opens new window
  3. Ibid.
  4. Ibid.
  5. Ibid.

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