My colleague Nick Prigitano, CFP®, wrote about when you should file for Medicare, but what happens to your Health Savings Account (H S A) after you retire?
We love HSAs due to the triple tax benefits associated with contributing to an HSA. To summarize, you can take a tax deduction for the contribution (which never phases out at any income level), the money can be invested and grows tax-free, and there is no tax when you withdraw the money to pay for qualified medical expenses. Of course, to be able to contribute to an HSA in the first place, you must be enrolled in an HSA-eligible health plan that has “HSA” in its name.
Some people use these tax-free growth accounts to accumulate money for future health care expenses, so these accounts can grow to $50,000 or more. After you retire, you can keep your HSA, and you can use it for reimbursement of your Medicare premiums (the ones normally deducted from your Social Security payment) but not your Medicare supplement plan premium. You also can use your HSA to pay for any qualified medical bills, just like before you retired. None of the distributions for Medicare premiums or qualified medical expenses are taxable to you.
In order to keep contributing to your HSA, you cannot be enrolled in Medicare. As Nick talked about in the first article above, once you turn age 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-sponsored health insurance, you have to sign up for Medicare. Note that COBRA and retiree health care plans are NOT considered employer-sponsored health insurance for this exception, 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, once you stop working after the age of 65, you have eight months to sign up for Medicare, 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 (after age 65), so factor in stopping your HSA contributions six months before you file for Social Security. If you forget, this should be caught on your tax return, and you have until the 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 before you turn 65, as you will be automatically enrolled in Medicare at age 65. As an example, if you turn age 65 in June, your last HSA contribution is for May, and you can contribute a total of 5/12 of the annual limits.
Note that after your death, an HSA can pass tax-free only to a spouse. If anyone else inherits it, the entire balance is taxed to that person in the year of inheritance. Plan to spend your HSA 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 tax-free to their partner at death; the account will be fully taxed at death if it hasn’t been spent.
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.
Jennifer Climo, CFP®, CPA, MSFP is an advisor at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first. If you need assistance with your investments or financial planning, please reach out to one of our fee-only advisors.