No Matter Your Age, Medicare is an Important Milestone for your HSA

Think you’re too young to consider Medicare? No matter your age, if you are covered by a qualified high deductible health plan (HDHP) with a health savings account (HSA), Medicare should be on your timeline. It’s a milestone you need to include in your long-term HSA planning.

Here’s why: Once you enroll in Medicare, you can spend your HSA funds, but you can no longer contribute to your HSA.

If you’re in your 20s or 30s: You can enroll in Medicare when you reach 65 years old, giving you a long-term timeframe for how long you’ll potentially contribute to your HSA (provided you remain covered by a qualified HDHP). Maximize your contributions to your HSA during that window and allow it to accumulate over the years as much as you can. One way to do this is to pay for healthcare expenses with another source and save your receipts. You can reimburse yourself at any time, in any year, using those receipts for eligible healthcare expenses you paid for with another source while covered by a qualified HDHP.

Here’s why: The HSA stays with you, no matter where you go. Contributions reduce your taxable income, and you can use the funds for eligible healthcare expenses without being taxed on them throughout the rest of your lifespan. That makes it a complement to your other retirement accounts. The more you save in your HSA to spend on healthcare in your retirement, the more of your 401k or IRA you can use for other expenses.

If you’re in your 40s or 50s: The next important milestone for you and your HSA is age 55. That’s when you can begin to contribute an extra $1,000 to your HSA every year. The federal government calls this a “catch-up contribution,” but if you’ve been contributing the maximum to your HSA since your 20s, these extra allowances can simply boost your balance in the years leading up to Medicare enrollment.

Here’s why: If you contribute an extra $1,000 per year between ages 55 and age 65 ((the age you become eligible to enroll in Medicare), that’s an extra $10,000 reduction in your federal income taxes over those years and more funds to spend on healthcare at the time of your contribution or in retirement.

If you’re in your 60s: Most people become Medicare eligible when they turn 65. But if you consult with your tax advisor and choose to delay enrollment, you can continue to contribute to your HSA up to 69 ½ years of age, including catch-up contributions, provided you are still covered by a qualified HDHP. Once you do enroll in Medicare (which will be required at age 70), your coverage will be retroactive to six months’ prior to enrollment, so be sure to stop contributing to your HSA in the month before the six-month window begins.

If you’re 70+: Use your HSA to pay for eligible healthcare expenses. You can also use those receipts you saved all these years to reimburse yourself for eligible healthcare expenses you paid with another source while covered by an HDHP. The funds from the reimbursements are not taxed as income, and you can use them for whatever you like.

You can also spend your HSA funds directly on anything you like after age 65, but you’ll be taxed on the withdrawals at your income tax rate at that time. If you don’t spend your entire HSA, you can leave it to a spouse or non-spouse beneficiary, either of whom can pay any qualified medical expenses on your behalf up to a year after your death. A non-spouse beneficiary who inherits your HSA will be taxed on remaining funds they inherit after any eligible healthcare expenses are paid.

No matter where you are on this road map, keeping your eye on key milestones like your eventual Medicare enrollment can help you get the maximum benefit from your HSA and provide a nice source of funds for your retirement. For more on Medicare and HSAs, check out this handy fact sheet or our webinar from February 16, 2022.

Ferne Emery is the compliance officer for Pinnacle’s Health & Benefits team. She can be reached at ferne.emery@pnfp.com or (336) 881-3209.