If you have a health savings account (HSA) and you’re turning 65, beware. Although HSAs are often used for retirement savings purposes, Medicare enrollees cannot contribute to HSAs. Here’s what you need to know about enrolling in Medicare and using your HSA.
HSAs – What They Are and Who Can Use Them
HSAs are special savings accounts designed for people who are enrolled in high deductible health plans. These accounts are funded on a pre-tax basis, and if you use the funds for qualified medical expenses, you can make tax-free withdrawals. Additionally, the money never expires – unused funds are simply carried over to the next year.
In order to contribute to an HSA, your health insurance plan must meet the minimum deductible amounts. For 2020, the minimum deductible is $1,400 for an individual plan or $2,800 for a family plan. There are also annual contribution limits. In 2020, you can contribute up to $3,550 for an individual or $7,100 for a family plan.
People who are not enrolled in high deductible health plans are not eligible to contribute to HSAs. Medicare is not considered a high deductible health plan, and Medicare enrollees cannot contribute to HSAs.
Medicare Enrollment and HSAs
You become eligible for Medicare when you turn 65. If you are already receiving Social Security retirement benefits when you turn 65, you will be enrolled in Medicare automatically. However, if you are not receiving Social Security retirement benefits yet, you will need to sign up. Your initial enrollment period lasts for seven months, including your birthday month, the three months before and the three months after.
If you do not enroll during the initial enrollment period, you may face expensive and ongoing late penalties when you finally do enroll. However, some people qualify for penalty-free late enrollment. If you are enrolled in a group health plan through either your current employment or your spouse’s current employment, and if the employer has at least 20 employees, you may be able to delay enrollment without facing a penalty.
Once you are enrolled in Medicare, you will not be able to contribute to your HSA. If you want to continue contributing to your HSA past age 65, and if you’re employed with group health insurance, you may consider delaying enrollment in Medicare.
Before deciding to delay Medicare enrollment so you can contribute to your HSA, consider the following issues:
- Do you qualify for penalty-free late enrollment? These penalties can be expensive, so be sure.
- Will you be enrolled in Medicare automatically? If you are receiving Social Security benefits, you will be enrolled in Medicare.
Also make sure that you don’t miss your special enrollment period for Medicare, which will occur when your coverage or employment ends. Enrollment in COBRA or a retiree plan does not qualify you for penalty-free late enrollment or a special enrollment period.
Using HSAs in Retirement
Medicare enrollees cannot contribute to HSAs, but they don’t lose their existing HSAs.
The money in your HSA will never expire, even if you change jobs, retire, switch health plans or enroll in Medicare. If you are no longer eligible to contribute to your HSA, you can still make withdrawals. Before you turn 65, any withdrawals that you make for non-qualified expenses will be taxed and subject to a 20 percent penalty. Once you turn 65, you no long need to worry about the 20 percent penalty.
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