Health Savings Accounts (HSA) and Medicare

hsa Medicare

HSAs can play an important role in your retirement and Medicare planning

Health Savings Accounts (HSAs) are accounts for individuals with high-deductible health plans (HDHPs). Many employers offer these plans, alongside opportunities to put money into an HSA pre-tax. When this money is used for qualified medical expenses, they’re not taxed when they’re used. They’re also a fantastic way to pay for medical costs, even when you’re on Medicare. If you’re currently working and you or your spouse has the opportunity to enroll in an HSA at work, take a look at doing it if you’re approaching retirement and/or Medicare eligibility. Read on to see why.

The Retirement Cost Gap

Even thought most people age 65 and older are on Medicare, the average retirement age is 62. That’s three years before Medicare eligibility! This is causing what is appropriately referred to as a “retirement cost gap.” While many of these younger retirees assumed that their savings would cover all of their costs, what they end up experiencing is expenses for health care needs are oftentimes more than they had anticipated.

According to a Fidelity study, the average 65-year-old couple today will require approximately $280,000 in today’s dollars for medical expenses throughout their retirement years. Once retired, healthcare costs continue to be one of the largest expenses in retirement. According to the Kaiser Family Foundation, the percentage of household budgets spent on health expenses is nearly 3 times as much for retirees on Medicare as for working households (14% versus 5%).
Based on a University of Michigan study, almost half (45%) “had little or no confidence in being able to afford the cost of their health insurance when they retire.” This is particularly the case with those who are in the 50 to 59 age group.

The Early Retirement Gap

When you look at all three studies and take a step back, a couple of things jump out at you. Number one, they clearly identify a massive gap in our healthcare coverage as a nation – that’s the gap in affordable individual coverage between ages 50-65. That age group are full of “early” retirees not yet 65 and able to get Medicare. There are a also whole host of people who are covered under their spouse’s employer-based plan that are dropped from their partner’s group insurance policy because they retired and enrolled in Medicare.

Health Savings Accounts and Medicare

To fill these gaps, HSAs should play a big role in ensuring you’ve got pre-tax money set aside for medical expenses BEFORE you are eligible for Medicare. Because once you hit 65, you can’t contribute to your HSA anymore. You can use your HSA as usual to pay for eligible health care expenses or Medicare Advantage premiums, it’s still tax-free. Or you can use the account for extra retirement income (taxable) once you reach age 65.
If you’re on Medicare, you can also use HSA funds to pay for:

  • Medicare Part A premiums
  • Medicare Part B premiums
  • Medicare Part D (prescription drug plan) premiums and copays
  • Medicare Medicare Advantage (MAPD) premiums

HSAs – The Stealth IRA

The maximum HSA contribution limit is $3,500 per year for an individual, while families can contribute $7,000. You can save an extra $1,000 per year if you’re over age 55. Contributions are 100% tax deductible from gross income. Unlike most tax saving vehicles, there are no income limitations for contributing.

Just because you fund an HSA, doesn’t mean you must use it to pay for your medical expenses! Some people use HSAs as a “stealth” IRA by collecting receipts for medical expenses, but not taking distributions until years later so they can maximize the period of time for tax-free compounding. There are a lot of HSA accounts that allow you to actually invest your HSA funds in say, a Vanguard fund just like an IRA. If you don’t use those funds for qualified expenses, it sits there and the magic of compounding interest over time does its thing. There’s no time limit on the look back for qualified medical expenses at this stage, so technically you could keep all of your receipts for as long as you like.

Of course, I’m not a financial advisor nor am I an accountant. Before making any tax or investment moves, be sure to consult with an advisor of some sorts.

Got a Medicare question? We love questions. Contact us.
Author Bio: Ben started Prepare for Medicare in 2014 to help people help people get objective answers to questions about Medicare. He’s held leadership roles at numerous Fortune 500 Medicare health insurers in product development, sales, marketing and strategy for over 20 years.

IRS Medical and Dental Expenses
Kaiser Family Foundation. Health Care on a Budget: The Financial Burden of Health Spending by Medicare Households

Health Insurance Decision-Making Near Retirement. National Poll on Healthy Aging. University of Michigan.
How to plan for rising health care costs. Fidelity.
Health Savings Accounts (HSAs) and Medicare. Medicare Interactive