Finally signing up for Medicare can be an exciting event. While it can be a lifeline for many people in retirement, Medicare isn’t free and unexpected health expenses can take a pretty big bite out of your budget.
But Medicare isn’t your only option for managing healthcare expenses. Contributing to a health savings account (HSA) before you retire is one way you can help prepare for future medical expenses and Medicare’s out-of-pocket costs.
How can a health savings account help pay your medical expenses?
People covered by Medicare typically pay monthly premiums, plus deductibles and copays when they receive care. In addition, if you’re on Original Medicare, you may have to pay out of pocket for items Medicare doesn’t cover, such as dental work, hearing aids and eyeglasses.
Planning ahead by setting up an HSA can help pay for qualified medical expenses—including deductibles and health plan premiums—after you stop working.
An HSA is a type of savings account that lets you set aside money on a pretax basis (that is, before taxes are deducted from your income) to help cover the cost of qualified medical expenses.
The money saved in your HSA can go toward deductibles, copayments, coinsurance, and other qualified services and other healthcare expenses to lower your overall healthcare costs.
Who can contribute to an HSA?
You can contribute if you meet all three of these conditions:
- You’re covered by an eligible high-deductible health plan (HDHP).
- You’re not enrolled in Medicare.
- You can’t be claimed by someone else as a dependent.
For 2024, the IRS defines an HDHP as any plan with a deductible of at least $1,600 for an individual or $3,200 for a family.
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 workforce. Some employers make contributions to their workers’ HSAs as part of their benefits package.
Once you sign up for Medicare, you can no longer contribute to an HSA. But if you retire before you reach Medicare eligibility, you can still contribute to your HSA. If you contribute to your HSA after your Medicare eligibility starts or coverage begins, you may have to pay a tax penalty.
How much can you contribute to your HSA?
In 2024, the IRS’s HSA contribution limit is $4,150 for individuals and $8,300 for a family. People 55 and older can contribute an additional $1,000 per year.1
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.
What are the tax advantages of an HSA?
The money you contribute to your HSA, up to the annual limit, is not considered taxable income.
If you are already making maximum contributions to your IRA or 401(k), you may also be able to make pretax contributions to you HSA for healthcare expenses in retirement.
Once you meet your HDHP deductible, you can take out money at any time for eligible healthcare expenses, and you won’t pay taxes on the money you withdraw.
As a reminder, if you contribute to your HSA after your Medicare eligibility starts or coverage begins, you may have to pay a tax penalty. Be sure to consult a financial advisor to see if an HSA is a good choice for you to help pay for healthcare expenses in retirement.