How to Keep Your HSA in Retirement

Health Savings Accounts (HSA’s), help those with high deductible medical plans save for out-of-pocket medical expenses. Used by working adults under 65, there are ways to keep your HSA in retirement.

HSA’s are tax-advantaged savings accounts. They allow people with high-deductible health plans to pay out-of-pocket costs. Over 22 million Americans have an HSA account. Intended for medical expenses, HSA’s can be a retirement vehicle.

Advantages to Using HSA’s for Retirement

Tax Advantages

Health Savings Accounts offer multiple tax advantages. Using your own funds to add to the account is tax-deductible. Account additions deduct from your paycheck pretax and reduce your taxable income. Interest, dividends and capital gains are not taxable. You can contribute up to $3550 for a single plan. You can contribute $7100 with family coverage. Those over 55 can contribute an extra $1000 per year.

Exceptions

Federal law does not tax additions to health savings accounts. States such as California and New Jersey do tax HSA contributions. Other states could follow suit. If your state taxes HSAs, you will receive the federal tax benefits.

Flexible

Unlike a Flexible Savings Account, funds in an HSA account are yours for life. You can take the account with you if you leave a job. You can contribute up to age 65, even if you are not working or self-employed.

No Penalty for Withdrawals & No Mandatory Withdrawals

One difference between a 401K/IRA and an HSA is that withdrawals for qualified medical expenses are tax-free. Unlike a 401K or IRA, you are not required to withdraw funds at a certain age. Michael Kitces, Director of Financial Planning for the Pinnacle Advisory Group offers this advice. “Health Savings Accounts are the most tax-preferred (retirement) account available.

Disadvantage to an HSA in Retirement

To qualify for an HSA, you must have a high deductible health plan. You cannot belong to an HMO. If you have low medical expenses, an HSA can save you money spent on premiums. For those with high healthcare costs, an HSA may not be for you.

The disadvantage of an HSA is that you cannot add to the account after age 65. However, there is a way you can contribute to a HSA in retirement.

Can I Contribute to an HSA After I Retire?

Yes, if you continue to work past age 65 for an employer with at least twenty employees. According to the IRS, you cannot contribute to an HSA if you have health insurance. If you receive Social Security benefits, you must elect Medicare Parts A and B. If you delay taking Social Security, you can continue to add to your HSA. If you leave your job, cancel the high deductible plan or receive Medicare, contributions stop. If you decide to sign up for Social Security, you receive six months of “back pay”. Your automatic enrollment in Medicare then backdates for six months. To avoid taxes, stop HSA contributions at least six months before applying for Social Security.

Can I Keep My HSA After I Retire?

You cannot add to the balance once you leave work. However, you can continue to keep the account. Withdrawals from an HSA after age 65 are not subject to penalty. Taxes do apply if not for medical expenses.

Should I Keep my HSA After I Retire?

Despite tax and retirement advantages, a Health Savings Account is not for everyone. Before enrolling in an HSA, consider insurance options, premiums, deductibles and health expenses. Compare your employer’s contributions to the HSA versus their 401K match. Look at Medicare premiums, Medigap costs and estimated out-of-pocket expenses. Then weigh against the advantage of an HSA. If you have questions, consult a financial advisor.