A health savings account may help you save money on medical expenses, depending on your insurance type. If you are eligible, you can use your health savings account (HSA) to cover certain medical costs, according to HealthCare.gov.
If you have a high deductible health plan, you can contribute to an HSA and use the untaxed money to cover medical costs, decreasing your total medical expenses.
High deductible health plans typically have lower monthly premiums than other insurance plans. However, individuals may pay more for medical services before coverage starts, per HealthCare.gov.
You can use an HSA to pay for deductibles, copayments, and coinsurance.
Examples of typical expenses for which you can use a health savings account include:
However, you generally cannot use money from an HSA for monthly insurance premiums, unless you receive Medicare, health care continuation coverage, or unemployment compensation.
For long-term care insurance, you may be able to pay your premiums through a health savings account.
The advantage of using a health savings account is that funds are not subject to federal taxes when you contribute or withdraw money to pay for qualified medical expenses. You can also earn tax-free interest.
Should you have money left over in your account at the end of the year, it rolls over. The funds stay active, remaining in your account until you need them. Even if you change jobs or retire, you can keep your HSA.
In some cases, you can use your health savings account to cover your spouse’s and dependents’ medical expenses, even if they are not on your plan.
The Internal Revenue Service sets contribution limits on HSA’s.
Other insurance plans can disqualify you from contributing funds to an HSA.
Although health savings accounts have several advantages, they also impose restrictions on how you use your money.
Taking money from your account for nonmedical or unqualified expenses before you reach 65 results in a 20 percent tax penalty. The 20 percent tax penalty for ineligible withdrawals does not apply if you are 65 and older. Still, you must pay income tax.
There are several ways to open an HSA.
When you enroll in Medicare, you can no longer contribute pre-tax dollars to your health savings account. To put untaxed money in an HSA, you must have high deductible health insurance without additional disqualifying coverage, such as Medicare. Once you have Medicare, you can no longer add tax-free funds to your account.
After you enroll in Medicare, however, you can still access your health savings account. One of the advantages of health savings accounts is that they are vested. As a Medicare beneficiary, you can continue using untaxed funds to cover the medical expenses your insurance does not bear, such as deductibles, coinsurance, and copayments. You cannot, however, use tax-free money to pay for Medicare supplemental insurance.
While the Internal Revenue Service (IRS) prohibits people from using untaxed capital for high deductible health insurance plan premiums, the rule differs for Medicare. When you enroll, you can use your HSA to pay your Medicare premiums without taxes.
People over 65 can withdraw funds from their health savings accounts for nonmedical expenses. Although these withdrawals are no longer tax-free, older adults do not incur the 20 percent tax penalty the IRS imposes on younger people taking funds HSA’s for ineligible expenses.
Since medical costs tend to increase with age, many prefer to keep their money in their health savings accounts to cover eligible medical expenses tax-free.
Some people with health savings accounts enroll in Medicare when they initially become eligible, forfeiting the ability to make HSA deposits for Medicare’s coverage. Others delay enrollment in order to continue making health savings account contributions.
Individuals who wish to delay enrolling in Medicare should not accept Social Security payments. This is because Social Security automatically registers beneficiaries for Medicare Part A, rendering them unable to make HSA deposits.
Medicare and the IRS recommend that people who have delayed enrollment after becoming eligible should cease health savings account contributions six months before joining Medicare to avoid a tax penalty. A six-month lookback period applies, as Medicare’s coverage is retroactive.
If you have an HSA, whether you should delay Medicare enrollment depends on your situation. The decision could significantly impact your finances. Speak with Ashley Day to learn more about your options for your health savings account as you approach retirement age.