Today, we delve into an essential yet complex aspect of healthcare finance – Health Savings Accounts (HSAs) and Medicare. These two elements might seem like they weren’t meant to coexist, but with a thorough understanding of the rules, they can provide significant financial benefits.

Note: This discussion primarily targets those who already have and are participating in an HSA, are approaching the age of 65 or are already in their 60s, and are preparing for Medicare.

HSAs can be quite beneficial if used strategically. In some aspects, an HSA with a substantial balance can be even more advantageous than a Roth IRA, which may sound surprising considering the Roth IRA’s tax-free nature. However, while Roth IRA contributions are made with after-tax money, HSA contributions are tax-deductible or pre-tax.

For singles over 55, you can contribute up to $4850 annually into an HSA. For families, the limit is $8750. These contributions are either tax-deductible or pre-tax if made by your employer. When spent appropriately on healthcare expenses, the money comes out tax-free, making it a win-win situation in some ways.

When approaching Medicare eligibility while having a significant HSA balance, tread carefully. For instance, you may be inclined to continue contributing to your HSA after enrolling in Medicare. However, this approach violates several rules.

It is important not to sign up for Medicare Part A (hospital insurance) while still working, keeping group insurance, and contributing to an HSA. Doing so could lead to complications, potential penalties, and taxes.

If you plan to retire late and want to delay signing up for Medicare, be aware that when you eventually enroll, Medicare will backdate your Part A coverage six months. This backdating can cause issues if you’ve contributed to your HSA during those six months.

In such complex situations, consider seeking professional help.

Once you’re enrolled in Medicare, you can begin to withdraw from your HSA for medical expenses, such as long-term care insurance premiums, and Part B and Part D of Medicare. However, you can’t use it to pay for Medigap insurance. Other potential eligible expenses include deductibles, over-the-counter medicines, and certain medical procedures not covered by Medicare.

Additionally, if you’re dealing with IRMAA (Income-Related Monthly Adjustment Amount), you can cover the Medicare normal Part B premium and the excess charge out of the HSA.

One strategy is to allow your HSA to grow during your retirement and then slowly chip away at it through eligible expenses that you will incur once you’re on Medicare. This method ensures you get the most from your HSA in the long term.

After 65, if you need to withdraw from your HSA for non-medical expenses, you will lose the tax-free benefit, but won’t face a penalty. The withdrawal will be treated like an IRA distribution, and you’ll need to pay taxes on it.

In case of the HSA owner’s death, if the beneficiary is the spouse, they can continue to use the HSA for eligible expenses just like the original owner. However, if the beneficiary is someone other than the spouse, they will need to withdraw the balance and pay taxes on it, though they won’t face a penalty.

The interplay between HSAs and Medicare primarily revolves around tax and tax planning. With a well-structured plan, an HSA can prove to be an efficient retirement benefit.

.In today’s post, we’re taking a deep dive into Health Savings Accounts (HSAs) and Medicare. At first glance, these two might seem like strange bedfellows but, when correctly navigated, they can harmoniously co-exist. This post is primarily for those who already have an HSA and are nearing the age to qualify for Medicare.

To shed light on this complex matter, my colleague Tom joins me. We aim to help you avoid potential pitfalls and walk you through the dos and don’ts of HSAs and Medicare.