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Notepad with text Health Savings Account HSA and stethoscope.

7 Tips for Using Your HSA Funds When You Have Medicare

If you have been contributing to a Health Savings Account or HSA Funds, you have been doing your future self a big favor. Fidelity Investments 2022 Retirement Health Care Cost survey calculates that a couple who both turn 65 in 2022 will spend $315,000 in healthcare costs throughout their retirement.

It’s a great idea to set aside some extra savings, and an HSA is a perfect vehicle for that. After all, your HSA savings will grow with you and can be used to pay for eligible medical expenses throughout your life. As a bonus, contributions to an HSA are tax-deductible, so you get the added benefit of lowering your taxable income when you contribute.

Once you are eligible for Medicare, you might wonder how that affects your HSA. After all, Medicare is a government-funded health plan, and HSAs are usually offered through employers or other private insurance plans.

In this article, we will outline some tips on how to approach Medicare and your HSA accounts. We will first review how to use your HSA and what limits are in place.

Tip #1 – Contribute as much as you can

If you do not currently have a health savings account, you definitely want to consider it. To be eligible, you must have a high-deductible health plan. The IRS defines high deductibles as follows:

For 2022, the IRS considers a high-deductible health plan as having an annual deductible of more than $1,400 (individual) or $2,800 (family) and total yearly out-of-pocket expenses must be less than $7,050 (individual) or $14,100 (family).

With an HSA, you are taking advantage of tax benefits and saving for future medical bills. It’s important to note that the funds in your HSA are yours, and you can use them at any time for eligible medical expenses, even after you turn 65.

If you already have an HSA when you become eligible for Medicare, you can still make contributions as long as your plan remains a high-deductible health plan. Make sure you know the contribution limits and consider using your income or savings to pay for eligible medical expenses before you turn 65.

Tip #2 – Understand how Medicare and HSAs work together

illustration with five of the healthcare insurance cards you might be carrying such as HSA Funds.

When you become eligible for Medicare, you do not have to give up on your HSA. You can use the funds for eligible expenses. However, you may not contribute to your HSA once enrolled in Medicare.

Tip #3 – Stop HSA contributions once you receive Medicare

First of all, you must understand that there are limits to your HSA contributions. The contribution limits for 2023 are as follows:

• $3,650 for an individual plan

• $7,300 for a family plan

When you stop contributing to your HSA will depend on whether you enroll in Medicare at age 65 or if you defer your enrollment.

If you enroll in Medicare as soon as you turn 65, your contribution limit is prorated for the months you are eligible to contribute. For example, if you enroll in Medicare on July 1, you can contribute up to $3,875($7,750 x 6/12).

When you receive Social Security, you are automatically enrolled in Medicare. Once enrolled in Medicare, you can no longer contribute to your HSA.

Your social security benefits are retroactive for six months. This means you can be reimbursed for medical expenses up to six months before you actually begin receiving benefits. You will be taxed on those amounts if you continue to make contributions.

If you delay your Medicare enrollment, your contribution period will end six months before the date you start receiving Social Security benefits. For example, if you enroll in Social Security on October 1, your contribution period will end on April 1. In this case, you may contribute up to $2,583.33 ($7,750 x 4/12).

Any contributions after you receive Medicare will be taxed at a rate of 10%.

Tip #4 – Use your HSA Funds for eligible expenses

Your HSA can pay for eligible medical expenses, as listed on the IRS website. Such costs include doctors’ visits, hospital stays, prescription drugs, and other related healthcare costs incurred throughout the year.

You can use your HSA to pay for premiums under Medicare Part B, Part C and/or Part D. This includes both the standard monthly premium and any additional premiums you may be charged for a plan with a lower deductible or co-payment. Your HSA can additionally pay for your Medicare deductibles and co-payments.

The IRS has a full list of eligible medical expenses here. It’s important to note that you cannot use it to pay for long-term care insurance premiums or any Medicare Advantage Plan premiums.

Tip #5 – Document everything!

File Folders

Don’t throw those receipts in the trash! Save them for health care expenses you’ve paid out-of-pocket. You can reimburse yourself from your health savings account for these expenses at any time, and that payment will be qualified—and tax-free!

Tip #6 – Look carefully at your state’s tax laws

Most states follow federal law when it comes to HSAs, but there are some exceptions. Make sure you understand the rules and regulations in your state for HSA contributions so that you don’t make any mistakes with your taxes.

Tip #7 – Keep an Eye on The Health Savings for Seniors Act

The Health Savings for Seniors Act was introduced in April 2022. This Bill proposes allowing individuals 65 and older to contribute to their HSAs, even if enrolled in Medicare. It has not been passed at the time of writing, but keep an eye on this one, as it will affect how you approach your health savings account.

BONUS TIP: Reach Out to The Medicare Family For Advice

Many decisions must be made relating to using your HSA. Contact The Medicare Family for advice if you are unsure about the best course of action. We can offer clear advice with your unique needs to help you maximize your HSA and ensure you get the most out of your retirement savings. Book a call today!

Sylvia Gordon, aka Medicare Mama®, is an expert on all things Medicare and Social Security. She is the 2nd Generation here at The Medicare Family and has served on the advisory boards of major insurance companies like UnitedHealthcare®, Cigna, and Anthem. In her free time, she can be found taking care of her animals (dogs, goats, peacocks, chickens), and reading a good book. Learn More.
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