Many people think Health Savings Accounts (HSAs) only cover doctor visits, but they offer much more—especially in retirement.
This article delves into advanced strategies for maximizing your HSA, highlighting surprising eligible expenses, potential pitfalls, and how to integrate your HSA into a comprehensive financial plan during your Medicare years.
HSAs and Medicare: What You Need to Know
A Health Savings Account (HSA) is a tax-advantaged account designed for individuals with high-deductible health plans (HDHPs) to save for qualified medical expenses.
Contributions are tax-free, the account grows tax-deferred, and withdrawals for qualified medical expenses remain tax-free.
However, once you enroll in Medicare, you are no longer eligible to contribute to an HSA. This is because HSA contributions are only allowed when you have no other health coverage besides an HDHP.
The month your Medicare coverage begins, your employer or account overseer should stop HSA contributions to avoid tax penalties. Even though you can no longer contribute, your existing HSA funds remain available for use.
These funds can cover a wide range of medical expenses in retirement, including Medicare premiums (except for Medigap), copayments, deductibles, and certain long-term care services. If used for qualified medical expenses, withdrawals remain tax-free.
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Surprising Expenses Your HSA Can Cover
While many are aware that HSAs can be used for typical medical expenses, several lesser-known eligible costs can be particularly beneficial during your Medicare years:
- Alternative Therapies: Treatments such as acupuncture are HSA-eligible, offering options beyond conventional medicine.
- Vision Care: Expenses for contact lenses, supplies, and even corrective eye surgeries can be paid with HSA funds.
- Mobility Aids: Purchases like crutches and wheelchairs are covered, helping maintain independence.
- Smoking Cessation Programs: Programs designed to help you quit smoking are eligible, supporting healthier lifestyle choices.
- Over-the-Counter Medications: Thanks to recent legislative changes, many OTC medications and menstrual care products are now qualified expenses.
- Diabetes Management Supplies: Items such as glucose monitors, test strips, and insulin are covered, aiding in effective diabetes management.
- Certain Surgeries: Procedures like breast and facial reconstructive surgery, when deemed medically necessary, are eligible.
- Home Modifications: Modifications to accommodate medical conditions, such as installing ramps or widening doorways, can be paid with HSA funds.
- Long-Term Care Expenses: Costs associated with long-term care, including services and insurance premiums, are qualified expenses, providing support for extended healthcare needs.
- Medical Travel: Travel expenses incurred for medical treatments, such as transportation and lodging, can be covered, ensuring access to necessary care.
Using Your HSA for Non-Medical Expenses After 65
Once you turn 65, your HSA gains an additional layer of flexibility—you can withdraw your HSA assets for any purpose without incurring the usual 20% penalty.
However, withdrawals are subject to regular income tax, similar to traditional retirement accounts like a 401(k) or an IRA. This means that while your HSA is primarily a healthcare savings vehicle, it can also be tapped into for general living expenses, such as:
- Housing costs: Rent, mortgage payments, property taxes, or home maintenance expenses.
- Travel and leisure: Use your HSA funds to enjoy vacations, cruises, or other recreational activities without worrying about a tax penalty.
- Daily expenses: Groceries, utilities, and other everyday costs can be covered if needed.
Since HSAs are not subject to Required Minimum Distributions (RMDs) like a 401(k) or a traditional IRA, you have greater control over when and how you withdraw funds, making it an excellent supplementary tool for tax-efficient retirement planning.
HSA vs. Traditional IRA or 401(k) for Retirement Income
HSAs can serve as an alternative or complementary retirement savings vehicle alongside traditional options like IRAs and 401(k)s. Here’s a quick comparison:
| Feature | HSA | Traditional IRA/401(k) |
|---|---|---|
| Tax Treatment on Contributions | Pre-tax (tax-deductible) | Pre-tax (tax-deductible) |
| Tax-Free Growth? | Yes | Yes |
| Tax-Free Withdrawals? | Yes, but only for qualified medical expenses | No, all withdrawals are taxed as income |
| Penalty-Free Withdrawals at 65+? | Yes, for any expense (but taxed if non-medical) | Yes, but mandatory RMDs apply at age 73+ |
| Required Minimum Distributions (RMDs)? | No | Yes (starting at age 73) |
Key Takeaways:
- HSAs provide more tax advantages than an IRA/401(k) because qualified medical withdrawals are always tax-free.
- No RMDs with HSAs mean you can delay withdrawals indefinitely, offering greater flexibility in managing taxable income in retirement.
- If used for non-medical expenses, an HSA acts similarly to a traditional IRA—taxable, but without an early withdrawal penalty after age 65.
By understanding these benefits, you can integrate your HSA strategically into your retirement plan, optimizing both healthcare savings and long-term financial security.
Non-Qualified HSA Expenses
It’s crucial to recognize that not all health-related expenses are HSA-eligible. For instance:
- Cosmetic Procedures: Elective cosmetic surgeries, including Botox for aesthetic purposes, are not qualified expenses.
- General Health Items: Items like vitamins or gym memberships, unless prescribed for a specific medical condition, are typically ineligible.
- Non-Medical Services: Services unrelated to medical care, such as housekeeping or meal delivery, do not qualify.
If you’re over age 65, there’s no 20% penalty on non-qualified HSA withdrawals at all. But note that non-qualified expenses will not qualify for income tax-free withdrawals.
You will have to pay income tax on any amounts you withdraw from your HSA that aren’t associated with a qualified medical expense.
LEARN MORE: IRS Publication 502 – Medical and Dental Expenses
Maximizing Your HSA During Medicare
Even though you cannot contribute to your HSA after enrolling in Medicare, the funds you’ve accumulated can play a significant role in your financial strategy:
- Paying Medicare Premiums: HSA funds can be used to pay premiums for Medicare Part B, Part D, and Medicare Advantage plans, reducing your out-of-pocket expenses. However, Medigap premiums will not qualify for tax-free withdrawals.
- Covering Out-of-Pocket Costs: Use your HSA to pay for deductibles, copayments, and coinsurance – tax-free and penalty- free, at any age.
- Supplementing Retirement Income: After age 65, HSA funds can be withdrawn for non-medical expenses without a penalty, though they will be subject to ordinary income tax, similar to a traditional IRA.
This flexibility allows your HSA to function similarly to a traditional retirement account.
As such, your HSA isn’t just a healthcare asset; It’s potentially a long-term strategic financial asset that has a variety of applications.
Including Dependents in Your HSA Strategy
A Health Savings Account (HSA) is a powerful tool for managing healthcare costs, not just for yourself but also for your family and dependents.
While HSAs are individually owned, you can also use them to pay tax-free for the qualified medical expenses of your spouse, children, or other dependents listed on your tax return.
This is true even if they aren’t personally covered under your high-deductible health plan.
Who Qualifies as a Dependent Under Your HSA?
The IRS defines dependents broadly for HSA purposes, allowing you to use your funds tax-free to cover medical expenses for:
- Spouse – Even if your spouse has separate health insurance, your HSA can be used to cover their qualified medical expenses.
- Children Under 24 – Your biological, adopted, or stepchildren can have their medical expenses paid for with your HSA funds, even if they aren’t on your HDHP.
- Aging Parents – If you provide at least half of their financial support and they meet IRS dependency criteria, you can use your HSA to pay for their medical expenses.
- Non-Relatives – Certain individuals, such as domestic partners or other relatives who rely on you for financial support, may also qualify if they meet IRS dependent requirements.
Maximizing Your HSA for Family Healthcare
By leveraging your HSA strategically, you can cover a wide range of medical expenses for yourself and your dependents, including:
- Doctor visits, prescriptions, and medical treatments
- Vision and dental care (glasses, contact lenses, braces, dentures)
- Long-term care services for aging parents
- Mental health counseling and therapy
- Medical supplies, hearing aids, and more
Note: Your HSA funds can be used for dependents even if they are covered under Medicare or another health plan,
Get a Letter of Medical Necessity
For certain expenses that aren’t explicitly listed as qualified, obtaining a Letter of Medical Necessity from your healthcare provider can substantiate the use of HSA funds.
This letter should detail the diagnosed medical condition and the necessity of the treatment or item, ensuring compliance with IRS regulations. For instance, a Letter of Medical Necessity could allow HSA funds to cover massage therapy for chronic pain or a weight-loss program for obesity-related health conditions.
How Health Sharing Plans Like Medi-Share 65+ Work with HSAs
Upon enrolling in Medicare, you might consider joining a health sharing plan, such as Medi-Share 65+.
These plans can offer cost savings and, in some cases, work alongside your HSA benefits. It’s essential to understand how these programs interact with Medicare and your HSA to make informed decisions.
What is Medi-Share 65+?
Medi-Share 65+ is a healthcare sharing program designed specifically for seniors aged 65 and older who are enrolled in Medicare Parts A and B.
It’s not insurance, but rather a faith-based community where members share each other’s eligible medical expenses.
Key Features of Medi-Share 65+:
- Lower Monthly Costs – May be cheaper than Medigap policies
- No Network Restrictions – See any provider who accepts Medicare
- Prescription Discounts – Access to discounted medications
- Additional Benefits – Includes telemedicine, dental, and vision discounts
Learn more about Medi-Share 65+.
Does Medi-Share Work with HSAs?
Health sharing contributions are NOT HSA-eligible expenses – meaning you cannot use HSA funds to pay for Medi-Share 65+ membership fees.
However, you can still use your HSA for qualified medical expenses that Medicare and Medi-Share 65+ don’t cover, such as:
- Deductibles and copays
- Long-term care expenses
- Prescription costs
- Vision and dental care
Tip: Before joining a health sharing plan, compare it to traditional Medigap insurance to see what works best for your budget and healthcare needs.
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The Bottom Line
What can I use my HSA for in retirement?
More than you think!
- HSAs cover a wide range of medical and healthcare-related expenses
- After 65, they can be used for any purpose without a penalty
- No RMDs make HSAs an excellent tool for tax-efficient retirement planning
- Health sharing plans like Medi-Share 65+ can complement Medicare, but they are NOT HSA-eligible expenses
Don’t miss out on HSA benefits! Maximize your contributions and integrate your HSA into your overall retirement strategy. Need help optimizing your HSA? Contact a Personal Benefits Manager today for expert guidance.
For Further Reading:
Mike Montes is a Personal Benefits Manager at MediGap Advisors. Mike has a passion for bringing clarity to those confused about Medicare. He is an authority on Medicare, Medicare supplement plans, Medicare Advantage plans, and Part D prescription drug plans. Read more about Mike on his Bio page.