Milestone posted a blog about when you should file for Medicare, but what happens to your Health Savings Account (HSA) after you retire?

Savvy people use these tax-free accounts to accumulate money for health care expenses, and the account value can grow quickly over time. After you retire, you can keep your HSA, and you can use it to reimburse yourself, your spouse, and other dependents for Medicare premiums (the ones normally deducted from your Social Security payment but not your Medicare supplement plan premium). You can also use your HSA to pay for any qualified medical expenses, just like before you retired. None of the account distributions used for deductibles, copayments and eligible LTCi or Medicare premiums will be taxable to you.

We love HSAs due to the tax advantages associated with the account, including a tax deduction. It is one of the few tax deductions that have no phase out at any income level! While some account holders keep their HSA funds in cash to cover medical bills, many plans offer investment opportunities. The earnings from these investments are tax free, and withdrawals for qualified medical expenses are also tax free.  Additionally, HSA contributions deducted from paychecks avoid FICA tax.

To be eligible to contribute to an HSA in the first place, you must be enrolled in an HSA eligible high-deductible health plan that meets IRS rules. Not all HDHPs are HSA qualified. You can contact your insurance company and confirm it is an eligible plan, and “HSA” should be in its name. If you have a Flexible Spending Account (FSA) for medical expenses (not childcare), this often means your plan is not HSA eligible.

You cannot be enrolled in Medicare and contribute to your HSA. As we talked about in our Medicare blog, once you turn 65, you are eligible for Medicare. To avoid lifetime penalties, once you are age 65 and no longer covered by your (or your spouse’s) employer’s sponsored health insurance, you must sign up for Medicare. It is important to note that COBRA and retiree health care are NOT considered employer sponsored health insurance, so if you have either of these types of health insurance and are over age 65, you must be signed up for Medicare to avoid the lifetime penalties.

Therefore, for most people who stop working after the age of 65, you have eight months to sign up for Medicare under the special enrollment period and you can no longer contribute to your HSA, effective the later of age 65 or six months prior to your Medicare enrollment date. Note that when you file for Social Security, you will automatically be signed up for Medicare if you’re older than age 65, so plan to stop your HSA contributions six months before you file for Social Security. If you forget, you have until the tax due date (usually April 15 of the following year) to remove the excess contributions and earnings from your HSA. If you started collecting Social Security before age 65, you must stop your HSA contributions the month you turn age 65, as you will be automatically enrolled in Medicare at age 65.

An HSA can only pass tax free to a spouse. If your account beneficiary is your spouse, the account becomes their HSA. The transfer is completed free of probate for the year in which you die. If anyone else inherits it, the entire account will be changed to a taxable account in the name of that beneficiary, and the full value is taxed to that person in the year of inheritance. Plan to spend your HSA money on medical bills during your and your spouse’s lifetimes. This is of special import to the LGBTQ+ community, where couples may not be married, and they need to understand that their HSA cannot be passed to their partner at death tax-free; the account will be fully taxed at death if it hasn’t been spent.

You can keep your HSA after you retire, so fund it annually if you are eligible based on the above rules. The 2024 contribution limits Health Savings Accounts are $4,150 for self-only coverage and $8,300 for family coverage, with an additional $1,000 catch-up contribution for savers 55 or older. Remember that HSAs are individual accounts, even if both spouses are covered by a family high-deductible health plan. While there’s no joint HSA, you can still benefit from having separate HSAs for yourself and your spouse as a spouse age 55+ can make a $1,000 catch-up contribution. A pro-rata rule applies to contributions in the year you change to non-HSA eligible health insurance.

If you aren’t sure about when to sign up for Medicare or have further questions about your HSA, and you want someone to help you with investing your resources so that you can achieve your goals, consider reaching out to one of our financial advisors.