HSA and Medicare: How to Make the Most of Both

Josh DeForest, CFA, CFP®

Sr. Managing Director


Learn how an HSA and Medicare can provide tax-free benefits for continuous health care coverage and financial stability in retirement.

HSA and Medicare: How to Make the Most of Both

If you’re nearing retirement or already there, you’re likely concerned about the rising cost of health care. Did you know that in addition to paying for qualified medical expenses, contributions to a health savings account (HSA) can help bridge the transition to Medicare and cover the cost of premiums? Read on to learn more about the benefits and special rules of using an HSA with Medicare.

Understanding HSAs

An HSA is a tax-advantaged tool that was crafted to assist individuals in saving for medical expenses. Key advantages of an HSA include:

  • Tax-free contributions and withdrawals for eligible medical expenses
  • Unrestricted rollover of funds from year to year, devoid of any “use it or lose it” conditions
  • Opportunities for investments, enabling tax-free growth of funds

To qualify for an HSA, you must be enrolled in a high-deductible health plan (HDHP). It’s important to note that once you’re enrolled in Medicare, contributions to an HSA are no longer possible. The existing funds in an account remain accessible for the rest of your life and can be used for medical expenses or for retirement. Planning ahead, therefore, is crucial. In addition, it’s important to understand the other potential benefits of Medicare when it’s time to enroll.

Understanding Medicare

Medicare is a federal health insurance program tailored primarily to individuals age 65 and older. Younger individuals with specific disabilities or health conditions can qualify for Medicare as well.

Comprising various plans, often denoted as “parts,” Medicare begins with enrollment in Original Medicare (Part A and Part B). Many opt to enroll in a supplemental coverage plan, although it’s not mandatory. This supplemental coverage proves beneficial in covering expenses not addressed by Original Medicare, and only 10% of enrollees choose to forgo it.

The intricacies of Medicare involve choices such as Medicare Advantage (Part C), Medigap (also known as Medicare Supplement), and prescription drug coverage (Part D). Given these options, determining the most suitable coverage for individual needs can be perplexing.

 Original Medicare (Part A and Part B)

  • Part A helps pay for hospitalization and is usually provided free because it’s been funded by your payroll taxes (though you’ll have to pay a deductible).
  • Part B is optional, requiring payment of a monthly premium. It helps cover outpatient medical services such as doctor visits and health screenings.
  • Part D is Prescription Drug Coverage which allows the cover of prescription drugs for people who are enrolled in Medicare-approved private plans in Part A or Part B.
  • Medigap (Medicare Supplement) is an option that covers expenses that are not paid by Original Medicare but purchased from a private health insurance company.
  • With Part A and Part B, you can choose your own doctor.

Medicare Advantage (Part C)

  • Offered by private insurance companies, these Medicare-approved plans are alternatives to Original Medicare. As with an HMO, the plan’s doctors and prescription drugs are usually covered. It is not as comprehensive as Original Medicare.

Remember: You can’t make contributions to an HSA after you enroll in any part of Medicare. That’s why strategic planning is necessary to receive the full benefits of both an HSA and Medicare.

Optimizing an HSA and your Medicare benefits

Delay Medicare enrollment. If you’re still working at age 65 and covered by an HDHP, consider delaying Medicare enrollment so you can continue to benefit from making tax-advantaged HSA contributions. Once you’ve decided to enroll in Medicare, HSA contributions should be stopped six months prior to avoid tax penalties.

Use your HSA for Medicare Premiums. You can use the remaining funds in an HSA to pay for Medicare premiums (except Medigap) once you’re enrolled in Medicare. This approach transforms pre-tax dollars into a tool for covering insurance costs even when you’re no longer able to make HSA contributions.

Tax-free medical payments. HSA funds can be used tax-free for many qualifying medical expenses, from prescription medications to long-term-care insurance premiums. This is particularly beneficial in retirement, when medical expenses can be costly and more frequent.

Invest HSA funds. Consider your HSA an investment retirement account. By investing a portion of the funds, you can potentially grow the account, resulting in a larger pool to draw from for future medical expenses.

Document everything. Ensure that you maintain detailed records for all medical expenses paid from your HSA. This documentation will be crucial for tax purposes and for verifying that funds have been used for qualified expenses.

Stay informed. Medicare rules and tax laws can change. Stay updated on alterations, policies, and regulations to ensure that you’re maximizing benefits and not incurring penalties unintentionally.

When used together, an HSA and Medicare can help provide a robust health and financial safety net during your retirement years. Understanding the nuances of both enables you to formulate a strategy that not only provides comprehensive health coverage but also can deliver financial benefits. For more information about how to make educated decisions that best suit your needs, seek guidance from a seasoned professional.

Mercer Advisors and Chapter have partnered to provide you with comprehensive Medicare guidance free of charge. Contact your financial advisor or schedule an appointment to learn more.

Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services.

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