Use Your HSA as Part of Your Retirement Strategy

While many people hope to retire before age 65, Medicare usually isn’t an option for health insurance before 65.

A recent GoHealth survey found that 43 percent of employed people ages 55 and older believe that lowering the Medicare eligibility age would allow them to retire earlier.

If health insurance is standing between you and early retirement, maybe there’s another way.

If you’re looking to retire before age 65 but worry that health insurance costs could derail your dream, perhaps a Health Savings Account (HSA) could solve your problem.

Money that you invest in an HSA is tax-free, can grow over time, and can be used to pay many medical expenses — also tax-free. So if you’ve invested enough money for long enough in an HSA, it could help bridge the gap between your early retirement and your pending eligibility for Medicare.

Sounds pretty good, right? Of course, it’s not quite that simple.

If your situation is right for it, using an HSA to pay for medical expenses before you turn 65 could be a perfect scenario for you. There is, however, a big caveat:

To contribute to an HSA, you must be enrolled in a High Deductible Health Plan (HDHP).

As defined by the Internal Revenue Service for 2022, a High Deductible Health Plan is a health insurance plan with an annual deductible of $1,400 or more. It allows annual out-of-pocket expenses of up to $7,050 a year.

In exchange for being willing to face the possibility of high out-of-pocket costs, people in HDHPs are rewarded with lower monthly premiums and the ability to save money to pay for their medical expenses with pre-tax contributions to a Health Savings Account:

• In 2022, individuals are allowed to contribute up to $3,650 a year to an HSA (the allowed contribution doubles for family coverage, as does the qualifying annual deductible and out-of-pocket maximum).
• If you are 55 or older during a year that you’re in an HDHP, you are allowed to contribute an additional $1,000 per year to your HSA (and your spouse can as well if 55 or older and enrolled in an HDHP).

Once the money is in your HSA, it can be used at any time (including after you’re no longer in an HDHP) to pay for qualified medical expenses for your family. Once you turn 65, the funds can be withdrawn and used for literally anything — still tax-free.

So if you’re not yet 65 but are contemplating retirement — especially if you feel like you’re in good health and won’t incur too many medical costs — an HDHP could be a cost-effective option to help you reach Medicare eligibility age.

• Once you enroll in Medicare, you are no longer allowed to contribute to an HSA, but you’re still allowed to use funds already in your HSA to pay for qualified medical expenses.
• If you don’t enroll in Medicare at 65, you can continue contributing to your HSA. If you’re working and in an employer-sponsored HDHP, you won’t have to pay late-enrollment penalties when you eventually enroll in Medicare.
• Do your due diligence before passing on Medicare at 65 in favor of remaining in an HDHP. Most people choose to enroll in at least Medicare Part A at 65 because it provides zero-premium hospital insurance.
• If you do pass on Medicare at 65, plan as best you can to stop contributing to your HSA at least six months before enrolling in Part A. That’s because Part A can cover you six months retroactively, and you can’t contribute to an HSA during a month Medicare covers you. Poor planning can result in your contributions being reversed along with tax penalties.