How Healthcare Savings Accounts work in retirement

Healthcare Savings Accounts (HSA) are tax advantaged accounts designed for people enrolled in high deductible medical insurance plans (HDHP) to pay for out-of-pocket medical expenses with pre-tax dollars. Your HSA contributions are only tax deductible before you turn 65 and become eligible for Medicare.

The money in the HSA accounts can be used to pay deductibles, or for co-payments, dental and/or vision care. The account balance can grow tax-free and carry over from year to year. Any interest, dividends or capitol gains earned in the account are non-taxable. To qualify for an HSA, you must have a high-deductible health plan and no other health insurance.

In general, the HSA accounts cannot be used to pay health insurance premiums. However, there are certain exceptions. Among them are: some long term care insurance policies, insurance premiums while you are getting federal or state unemployment compensation, continuation of coverage, like COBRA premiums or as of age 65, Medicare premiums.

Medicare payments? Yes. Medigap? No.

At age 65, you can use your HSA savings to pay for Medicare parts A, B, and D and Medicare HMO premiums tax-free and penalty-free. In other words, you can continue to use your HSA savings for qualified medical expenses at age 65 for as long as you have funds in your health savings account.

However, if you participate in any type of Medicare (Part A, Part B, Part C – Medicare Advantage Plans, Part D, and Medicare Supplement Insurance -Medigap), you are not eligible any longer, to contribute to an HSA.

Savings choices for 2017

  • HSA holders can choose to save up to $3,400 for an individual and $6,750 for a family (HSA holders 55 and older get to save an extra $1,000 in “catch-up savings” which means $4,400 for an individual and $7,750 for a family) – and these contributions are 100% tax deductible from gross income.
  • Minimum annual deductibles are $1,300 for self-only coverage or $2,600 for family coverage.
  • Annual out-of-pocket expenses (deductibles, copayments, and other amounts, but not premiums) cannot exceed $6,550 for self-only coverage and $13,100 for family coverage.

To contribute pre-tax dollars to an HSA you cannot have any health insurance other than a HDHP. However, you may continue to withdraw money from your HSA after you enroll in Medicare (age 65) to help pay for medical costs in retirement.

Although Flexible Spending Accounts (FSA) have some of the same advantages as HSAs, with an HSA there is no time limit involved in spending what you have accrued in the account.

FSAs can be used to pay for certain medical and dental expenses for you, your spouse if you’re married, and your dependents. However, according to the website, you generally must use the money in an FSA within the plan year. But your employer may offer one of 2 options:

  • It can provide a “grace period” of up to 2 ½ extra months to use the money in your FSA.
  • It can allow you to carry over up to $500 per year to use in the following year.

Your employer can offer either one of these FSA options but not both — and it’s not required to offer either one.

The real benefit in your retirement, is that money that has been deposited into an HSA goes into the account tax-free during your pre-retirement years, it grows and accrues tax-free, and is not taxed when it is used on qualified medical expenses. HSA contributions generally are completely tax deductible from your gross income, which will lower your federal income taxes. Consumers who are eligible (have a HDHP), and looking forward to retirement, would do well to stockpile the maximum amount in an HSA for use as a buffer against rising healthcare costs. For more about the tax advantages of HSAs: