What is the value of an HSA into retirement?
As people plan for retirement they are ever mindful of what funds they will need to meet their monthly expenses. A Health Savings Account (HSA) could be an important tool in retirement planning.
HSAs can be used to reimburse Medicare premiums. Citizens receive Part A of Medicare (which covers hospital expenses) without cost. Part B has a monthly cost that is deducted from an individual’s Social Security benefits. Part C is Medicare Advantage, a plan also eligible for reimbursement from an HSA. And Part D is prescription drug coverage and is also deducted from Social Security. Without Part D there is no prescription drug coverage in Medicare A, B, or C. While Medicare Supplements, commonly called Medi-Gap policies, are specifically prohibited from being paid from an HSA.
HSA accountholders entering retirement can simply transfer money from their HSA to their checking account for expenses related to Medicare Part B, C, or D, increasing their spendable monthly income. Or they can wait until a more strategic time to take that money out tax free.
Some people retire early and may utilize COBRA until reaching age 65. Typically COBRA will last for 18 months after a person retires. HSAs can be used to pay COBRA premiums until they reach age 65 if within that 18-month window.
Another important feature is the eligible expenses besides medical, including dental, vision, and hearing expenses. Many people don’t realize hearing aids are not covered by Medicare or health insurance plans. But they are covered by an HSA.
Money can also be drawn out for non-qualified expenses after age 65 without the 20 percent excise tax, although income tax will apply as in a traditional 401(k). But unlike a 401(k) plan there is no Required Minimum Distribution requirement. This means that money doesn’t have to be withdrawn until the accountholder desires to do so. Additionally, there is no tax paid for medical, dental, vision, hearing, or Medicare and COBRA premiums – EVER!
At death the HSA becomes the HSA of the spouse. A non-spouse beneficiary will receive the money as a taxable event much like a checking or savings account inheritance.
A few more things to consider:
- If possible, allow your HSA balance time to begin building before you start making withdrawals. Save the receipts and the money can be taken out anytime in the future.
- Consider investing this money in your HSA to potentially maximize the opportunity to build the balance.
- Establish a spouse account to take advantage of the additional $1,000 catch-up contribution.