If you are among the many Americans enrolling in Medicare for the first time during the October 15-December 7 open enrollment period, you have probably done a good bit of research on plans and specifics and feel confident in the coverage you have selected.
However, if you’ve been contributing to a Health Savings Account (HSA), it’s crucial to understand how your Medicare eligibility status and enrollment can affect your HSA and your taxes. This is an important aspect to consider, so take some time now to ensure you’re fully informed before taking the next steps.
A Health Savings Account (HSA) is a tax-advantaged account that allows you to save money to pay for allowed medical expenses. Your contributions to this account are tax-deductible or pre-tax depending on how you contribute. If the contribution is made by payroll deduction, the funds are taken out of your paycheck before taxes. The funds in these accounts can grow and earn tax-free interest over time and when needed, the tax-free HSA money can be used to pay qualified medical expenses such as deductibles and copays as well as covered drug, dental and vision care costs. Once you reach the age of 65, your HSA can be used for any expense; however, you will need to pay taxes on any withdrawals that are not used for qualified medical expenses. There are limits to how much you can contribute to your HSA annually. For those who are 55 and older, you can contribute up to $1,000 extra each year as a “catch-up” contribution. For more information on HSA limits and other specifics, visit the IRS website.
Once you are enrolled in Medicare Part A and/or B, you may continue to use your pre-tax dollars from your previously established HSA account toward qualified medical expenses, including paying your Medicare premiums. That account remains yours regardless of your enrollment status. However, once enrolled, you will no longer be allowed to contribute to your HSA. Additionally, those who have not established an HSA prior to Medicare enrollment will no longer be allowed to do so once enrolled.
If you are approaching Medicare eligibility and plan to apply for Social Security retirement benefits, you should stop contributing to your HSA six months prior to applying for the benefits. Social Security will backdate your retirement benefits by up to six months if you apply after your full retirement age. This means your Medicare coverage could also be backdated, potentially putting you in a position where you’ve contributed to your HSA during a period when you should not have and could result in tax penalties.
If you have already applied for and are receiving Social Security retirement benefits (which automatically entitles you to Medicare Part A) you are not allowed to contribute to your HSA. The only way to opt out of Part A is to pay back all the Social Security benefits you received, as well as the total amount Medicare has paid for your claims, if any. You can then resume contributing to your HSA but will no longer receive Social Security benefits or Part A coverage until you reapply in the future.
If you have applied for Medicare Part A not realizing the impact on your HSA contributions but have not applied for Social Security retirement benefits, you can withdraw your Medicare application and continue contributing tax-free to your HSA without penalty from Medicare. To withdraw your Medicare application, call your local Social Security office. You can then reapply for Medicare when the time is right for you.
Timing your HSA contributions, Social Security benefit application, and Medicare application can be challenging. It’s important to consider all your options, as these decisions can significantly impact your overall financial plan. If you have questions about your specific situation or want to review your plan as you transition into this stage of life, don’t hesitate to reach out to your advisor for guidance.
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