Complement your retirement plan with a health savings plan for the things Medicare doesn’t cover.
Retirement is an exciting time and a new phase of life worth celebrating with family and friends; however, planning for retirement can sometimes bring uncertainty. Things like changes in your personal life, market fluctuations and uncertainty around Social Security can raise questions in even the most detailed plan.
Although Medicare covers a variety of medical expenses, it isn’t the all-encompassing healthcare coverage many people assume. Fortunately, you can leverage the benefits of a health savings account (HSA) to accumulate additional savings for medical and healthcare-related expenses.
An HSA can help cover healthcare costs that Medicare doesn’t, along with dental, hearing and vision expenses. With comparable – and, in some cases, better – perks than a 401(k) or IRA, your HSA can help you save and prepare.
An HSA is a tax-advantaged medical savings account that allows you to set money aside and withdraw funds to pay for qualified medical expenses. HSA accounts are unique in that they are triple tax advantaged. Contributions to an HSA are tax deductible, earnings are tax free, and distributions from HSA accounts are tax and penalty free if the funds are used to pay for or reimburse yourself for qualified medical expenses.
HSAs can be especially useful because they are not “use it or lose it” accounts. Unlike flexible spending accounts, unused HSA dollars roll over every year.
The annual amount you can contribute to an HSA depends on whether you have single or family health coverage, if you have continual coverage throughout the year, and if you are eligible to make a catch-up contribution (for age 55 and older). For 2025, HSA contribution limits are $4,300 for an individual or $8,550 for a family. Individuals 55 and older can contribute an additional $1,000 catch-up contribution for a total of $5,300 per year.
Distributions that are used for other purposes beyond qualified medical expenses are subject to tax and a 20% penalty if you are under age 65. If you are 65 or older, you can use your HSA much like a 401(k) and withdraw funds for any purpose but will have to pay income taxes on withdrawals made for nonmedical purposes.
If you or your spouse have creditable health insurance from a group employer, then you could consider delaying Medicare enrollment and continuing to contribute to your HSA, even once you turn 65. Something to consider is that if you decide to delay enrolling in Medicare beyond age 65, when you do eventually enroll, Medicare will automatically give you six months of retroactive benefits. This means if you decide to delay enrollment, you’ll need to stop contributing to an HSA six months before you do decide to enroll in Medicare. If you do delay enrollment, this may also impact how much you can contribute in that final year, depending on when in the year you eventually enroll.
Your decision to delay may depend on the benefits coverage between Medicare and your employer, plan costs or your current tax picture and the tax advantages you gain by contributing to an HSA. No two individuals face the same situation when it comes to their healthcare benefits. Depending on your personal circumstances, goals and budget, an HSA may help you to maximize your benefits.
