Medicare MSA Plans, also known as Medicare Medical Savings Accounts, are a great way to control out-of-pocket Medicare costs, lower your Medicare Advantage (Part C) insurance premiums, and take more direct control of your healthcare.

How To Invest Your Medicare MSA Plan Money

What is a Medicare MSA Plan? 

Medicare MSA plans are innovative Medicare Advantage plans that combine a high-deductible health insurance policy with a special savings account to offset the higher deductibles. 

Each year, the insurance company deposits a defined amount of money into the Medical Savings Account. Plan members can then use the funds in this account to pay Medicare costs, such as deductibles, co-insurance, and copays that would otherwise come out of pocket. 

MSAs function similarly to Health Savings Accounts, which are used outside of the Medicare context along with high-deductible health plans.

The higher deductibles allow Medicare Advantage plans to keep MSA plan premiums low. In fact, MSA plans currently don’t charge a monthly premium – though you must still pay your monthly premium for Medicare Part B.

Meanwhile, the money in your MSA can help you absorb your other out-of-pocket costs for Medicare Part A and B services.  

How Medicare MSA Plans Work

If you elect an MSA Medicare Advantage Plan, the insurance company will deposit a set amount of cash into your MSA account each year. The exact amount of the deposit varies by plan. 

This money is yours to use as needed for qualified medical expenses.

You cannot contribute money to your own MSA. Only your Medicare Advantage company can make that initial deposit.

Once your deductible is met, your MSA plan will cover all Medicare costs for the year above that threshold. So MSA plans are essentially extremely cost-efficient catastrophic care plans, but with a kicker: “Free money” deposited into your MSA each year that you can use for medical expenses.

With MSA plans, at any given time, your out-of-pocket exposure for Medicare Part A and B-covered expenses is limited to amounts above your MSA balance, and below your plan’s

MSAs Can Accumulate Over Time

Unlike Flexible Spending Accounts, which have a “use-it-or-lose-it” provision, Medical Savings Accounts allow unspent funds to accumulate each year.

This provides plan members an incentive to be smart healthcare consumers. Because MSAs allow unused funds to accumulate year after year, plan members are encouraged not to overspend needlessly on health care.

For example, users with MSAs are more likely to limit expensive MRIs and other procedures, choose generic drugs over expensive brand names, visit their primary care doctors and urgent care clinics rather than go to emergency rooms. 

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Medicare MSA Plans and No Care Networks

Unlike other Medicare Advantage plans, Medicare MSA plans usually don’t have care network restrictions. That means you are free to choose your own providers. You can use your MSA account and plan benefits with any doctor or facility that takes Medicare patients.

If you use MSA money, providers cannot charge you more than the Medicare-approved reimbursement amount for their services.

Some plans provide information and recommendations for providers in your area. However, it’s a good idea to do your own research, and ask friends and family who the great doctors and providers in your area are, as well.

Paying For Care With a Medicare MSA Plan

Paying for care with an MSA is very easy. Usually, the financial institution acting as custodian for your MSA will send you a debit card linked to your account.

Your provider will tell you what you must pay for your deductible, coinsurance, or co-pay under Medicare Part A and B. Just present your debit card to pay these expenses.

If your deductible, copay, and coinsurance amounts are greater than your MSA balance, you must pay the remainder out of your own savings.

Optional Additional Benefits

Some MSA Plans offer additional benefits, such as Silver Sneakers fitness club privileges, or vision, hearing, and dental coverage, though at an additional cost. You are free to decline these add-ons and pay out-of-pocket.

How Are Medicare MSAs Taxed?

Medical savings accounts are among the most powerful tax tools in the retirement arsenal. They offer a triple tax advantage:

  1. Contributions to your Medical Savings Account are tax free.
  2. Growth is tax-deferred as long as the money stays in the account. There’s no tax on interest, dividends, or growth inside of Medicare Savings Accounts. The money continues to grow tax-deferred as long as it’s still in a qualified MSA. The tax-deferral helps your MSA money grow faster, just like in a health savings account or IRA.
  3. Any withdrawals from your MSA you use for qualified medical expenses are tax-free.

There are multiple benefits to this:

First, that means you are paying for covered medical services and devices entirely with tax-free money. This is a significant advantage over having to pay for medical care out of your own personal savings or out of retirement accounts. 

Second, because withdrawals from your Medicare MSA to pay qualified medical expenses are tax-free,  (change, because they don’t withdraw money from the plan, they withdraw it from the MSA)

Medicare MSA Plans and Prescription Drugs

MSA plans do not include coverage for prescription drugs. But you can still use funds in your own MSA to pay for prescription drugs. If you want protection against the high cost of prescription drugs, you should consider a separate, standalone Medicare Part D policy.

Call us at 800-913-3416, or make an appointment with us if you need to add prescription drug coverage, or you just want to review your overall Medicare strategy and make sure you’re in the best possible plan available in your area.

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What Counts as a Medical Expense for a Medicare MSA Plan?

The IRS defines the term medical expense broadly. Generally, you can use MSA funds for items and services not covered under your Medicare Advantage plan, as long as they are intended to treat a specific medical condition, and not just for general health purposes.

However, not all of these expenses will count toward your deductible under the plan. Only services and items covered under Medicare Parts A and B will count toward your deductible for the year. 

Medicare Part A covers hospitalization costs, while Medicare Part B covers physicians’ fees, lab fees, durable medical equipment, and up to three pints of blog. 

What Happens If I Don’t Use MSA Money for Medical Bills?

However, if you withdraw money for anything other than a qualified medical expense, you will have to pay ordinary income tax on that amount – along with a steep 50% penalty on top of that.  

That’s one of the most severe administrative tax penalties in the U.S. tax code. So it’s important that you maintain accurate records: Keep all your receipts and bills for all medical expenses, in case the IRS audits you or challenges one or more of your transactions. 

How to Invest Your Medicare MSA Plan Money

Many people choose to keep their MSA money in the original account set up by their Medicare Advantage company.

Returns will be low. But risk is also very low. And if you use the debit card issued to you from the financial institution your Medicare Advantage company partners with, you can easily track your spending online. You’ll also have a ready record of your MSA transactions when you file income taxes the following year.

This strategy is appropriate for most people.

However, some people who are in good health spend little or nothing out of their MSAs for years. Their MSA accounts can grow to substantial sums.

If you prefer, you can take balances over $2,000 and transfer them to other qualified MSA accounts that have more investment options, in hopes of getting a better return.

Potentially, you can invest your MSA funds in anything you like, with just a few exceptions:

You can’t invest MSA assets in life insurance, collectibles, alcoholic beverages (e.g. wine collections). You also can’t use your MSA to transact directly with yourself, your spouse, ascendants or descendants, or any entities these individuals control. 

This would violate prohibited transaction rules, and cause your MSA’s tax benefits to be disallowed, resulting in taxes and penalties. 

Self-Directed MSA Investing

But you can invest MSA assets in anything else, including stocks, bonds, money markets, gold and precious medals, crypto (if you dare!), and with some additional planning, even closely-held corporations and LLCs. 

Naturally, if your investments do poorly, you’ll need to have other assets available to pay for any needed health care, up to your deductible.

And you should consider liquidity risk, too: If you need cash quickly to meet your deductible for an operation, or pay for an expensive medication, it won’t do you much good if the cash is tied up in a real estate LLC!

Unless you have some other assets available to meet your deductibles, A medical condition could also force you to sell stocks or real estate to raise the needed cash during a market downturn – the worst possible time!

But if you can absorb the risk of a market downturn, and you have the assets to meet your deductibles even if markets turn against your MSA investments, then self-directed MSA investing may allow you to generate a better return.

While you’re engaging in self-directed MSA investing, you’ll still enjoy all the tax benefits of a medical savings account. You still get tax-deferred growth, and tax-free withdrawals for qualified medical expenses.

You’ll also have some potential for upside gain if your investments do well. However, you also take on more risk, too.

Additionally, when you transfer money out of your original MSA account to a new MSA account, you are responsible for documenting all your withdrawals, transactions, and medical expenses. 

This is important because if you can’t match withdrawals against medical expenses, you will face the steep IRS penalty for non-qualified withdrawals.  

Enrolling in a Medicare MSA plan

For individuals, you can generally join a Medicare MSA plan either when you’re first eligible for Medicare, or during the Annual Election Period between November 15th and December 31st of each year.

If you’re looking to enroll, and reading this during the Annual Election Period, click here and make an appointment as soon as you can, before your open enrollment period ends.

We’ll help you go through all your options, including Medicare Advantage, MSA accounts, Medigap plans, and low-cost non-insurance healthsharing alternatives, and help you feel confident that you’re making the best decision. 

Leslie Jablonski is a Personal Benefits Manager at MediGap Advisors. Leslie has a passion for bringing clarity to those confused about Medicare. She is an authority on Medicare, Medicare supplement plans, Medicare Advantage plans, and Part D prescription drug plans. Read more about Leslie on her Bio page.