Smart Ways to Use Your HSA in Retirement
Discover the many choices and new flexibility to cover expenses
Health savings accounts (HSAs) can work in tandem with high-deductible health plans, offering triple tax-advantaged benefits. Money goes in pre-tax (or tax-deductible in some cases), grows tax-free and comes out tax-free (for qualified medical expenses). But did you know that HSAs can be used in a variety of ways to help manage other health costs even after you retire?
Is my plan eligible?
HSA account owners don’t know that they can use their HSA to pay for health expenses in retirement
4 in 10
Source: Consumer Engagement in Health Care Survey, Employee Benefit Research Institute and Greenwald & Associates, December 2019.
While you can’t contribute to an HSA once you enroll in Medicare, you, your spouse, and your tax dependents can tap the funds to help cover eligible costs at any time. In this eBook, you’ll discover some of the most valuable ways you can use HSA funds in retirement. Click through to get started.
© 2020 The Kiplinger Washington Editors, Inc.
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Select a topic
1
Pay for OTC products and medications
2
Bridge a gap before Medicare
3
Manage the cost of insurance premiums
4
Cover dental, hearing and vision care
5
Afford health-related home modifications
6
Tap it for any expense (if necessary)
7
What an HSA doesn't cover in retirement
8
HSA do’s and don’ts
For 2020 and 2021, an HSA-eligible health insurance policy must have: A deductible of at least $1,400 for self-only coverage. A deductible of $2,800 for family coverage Source: HealthCare.gov.
What is an HSA? An HSA is a powerful savings account that can help you cover qualified medical expenses through your pre-tax contributions. Paired with high-deductible health insurance plans, you can use your HSA funds at any time and any unused funds roll over every year.
You can now withdraw HSA funds tax-free for many over-the-counter health products and nonprescription drugs. That’s because the Coronavirus Aid, Relief and Economic Security (CARES) Act enacted earlier this year permanently modified a prior rule – making OTC items now reimbursable without the prescription or doctor’s order that used to be required. This expansion can help defray the average cost of $442 that US households spend annually on common OTC products. And the change is retroactive to Jan. 1, 2020.
HERE ARE JUST A FEW HSA-ELIGIBLE OTC ITEMS
Acetaminophen
Aspirin
Antihistamines
Decongestants
Cough, cold and flu remedies
Non-steroidal anti-inflammatory drugs
Heartburn medications
Of course, you can continue to use HSA money for prescription co-pays as always.
BACK
IRS outlines changes to health care spending available under CARES Act, IRS.gov, June 17, 2020. https://www.irs.gov/newsroom/irs-outlines-changes-to-health-care-spending-available-under-cares-act Value of OTC Medicines to the US Health Care System, Consumer Healthcare Products Association, March 2019. http:// overthecountervalue.org/wp-content/uploads/2019/04/ CHPA_OTC_Value_WhitePaper.pdf
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Research shows a large percentage of retirees leave the work force earlier than planned, with many saying they retired at age 62. But you can’t enroll in Medicare until age 65 – creating a potential gap in health coverage. If you stop working before age 65 and don’t have access to retiree health coverage from your employer, one option may be COBRA, the federal law applying to employers with 20 or more employees that lets you continue group health coverage (at your cost) for up to 18 months after you leave a job. (Many states have similar continuation laws for smaller employers).
In that case, you can use HSA money to pay for COBRA premiums and out-of-pocket costs. And if your employer offers an HSA-eligible, high-deductible COBRA policy, you may also still be able to contribute money to your HSA. Note: If you lose your job, you also can treat health insurance premiums as HSA-qualified medical expenses while receiving unemployment compensation.
Retirement Confidence Survey, “Expectations About Retirement,” Employee Benefit Research Institute, 2020. https://www.ebri.org/docs/ default-source/rcs/2020-rcs/rcs_20-fs-2.pdf?sfvrsn=ffbc3d2f_6
How Much Do Medicare Beneficiaries Spend Out of Pocket on Health Care?, Kaiser Family Foundation analysis of Centers for Medicare & Medicaid Services’ Medicare Current Beneficiary Survey, Nov. 4, 2019. https://www.kff.org/medicare/issue-brief/how-much-do-medicare-beneficiaries-spend-out-of-pocket-on-health-care/#healthcarecosts
People with traditional Medicare spend an annual average of $2,294 out of pocket for health care premiums alone. Contributions to an HSA must end once you enroll in Medicare, but after you turn age 65, money in the account can still be used to pay premiums, deductibles and coinsurance for: • Medicare Part B (the standard monthly premium is $144.60 in 2020 – or higher depending on your income) • Medicare Part B deductible ($198 annual cost in 2020) and copays (20% of Medicare-approved amount for most services) • Medicare Part C – Medicare Advantage plans (but not for Medigap premiums) • Medicare Part D (prescription-drug coverage) If your Medicare premiums are paid automatically from your Social Security benefits, you can withdraw HSA money tax-free to reimburse yourself for these expenses. What’s more, your HSA dollars may also be used to pay a portion (based on age and adjusted annually) of long-term-care insurance premiums. Select your age below to see how much you can withdraw tax-free from an HSA for long-term care premiums.
Click to see how much you can withdraw tax-free
40 or under
41–50
51–60
61–70
71 or older
$430
$810
$1,630
$4,350
$5,430
Review the latest details of IRS Publication 969 for more information about HSAs and these eligible expenses.
Click to read more
Dental, Vision, And Hearing Services: Access, Spending, And Coverage For Medicare Beneficiaries, Health Affairs, February 2020. https://www.healthaffairs.org/doi/10.1377/hlthaff.2019.00451
The IRS provides yearly updates on the medical and dental expenses that are and aren’t considered qualified medical expenses. Find the latest information about covered medical expenses in IRS Publication 502.
New retirees are sometimes surprised to learn that traditional Medicare provides only limited coverage of these services. Most Medicare Advantage plans do offer them as supplemental benefits, however. Yet among Medicare beneficiaries with coverage overall, a recent study shows that out-of-pocket expenses still make up 70% of dental spending, 62% of vision spending and 79% of hearing spending. Once again, here’s where an HSA can help support such high-need health services.
You can use your HSA funds to pay for:
Dental treatment, including X-rays, fillings, braces, extractions and dentures
Hearing aids and batteries, repairs and maintenance
Eye exams, eyeglasses, prescription sun or eye surgery
Certain improvements, special equipment or upgrades you make to your home may be HSA-eligible expenses if they’re medically necessary vs. just age-friendly. Common examples include: • Adding an air-filtration system • Building ramps • Changing doorknobs • Widening doorways • Installing lifts or elevators • Installing railings or support bars • Lowering cabinets • Moving electrical outlets
Such improvements fall under capital expenses for IRS purposes, and the extent of their eligibility varies depending on whether the changes increase the value of your home. If your property value isn't increased by the improvement, you can count the entire cost as an eligible medical expense. If property value is boosted by the upgrade, you can only include a partial amount. You can find a capital expense worksheet in IRS Publication 502.
Here’s an example:
Say you spend $10,000 to install an elevator for medical reasons. An appraisal shows that improvement increases your home’s value by $5,000. The difference ($5,000) is the amount you can claim as an eligible expense. Additionally, costs to maintain and operate any upgrade you make – as long as it’s still medically necessary – also qualify.
Fidelity Retiree Health Care Costs Estimate, Fidelity Benefits Consulting, 2019. https://s2.q4cdn.com/997146844/files/doc_news/ archive/b6f07a26-3aa9-4a98-af00-b1b783cfd552.pdf
However, before you deplete that account for other reasons, keep in mind that Fidelity estimates that a 65-year-old couple who retired last year will need $285,000 for health care costs in retirement – excluding OTC medications, most dental services and long-term care. Your HSA can be a versatile source of tax-free money to help tame some of those bills.
If you withdraw money from your HSA for something other than qualified medical expenses before you turn 65, you’ll have to pay income tax plus a 20% penalty. But after you turn 65, that 20% penalty no longer applies. That means you may pull funds from an HSA for anything you wish – as long as you don’t mind owing tax on that withdrawal. It’s similar to the tax deferral of a 401(k), for instance.
. . . you may pull funds from an HSA for anything you wish – as long as you don’t mind owing tax on that withdrawal.
Possible exception: Certain expenses for things that promote overall health or treat a specific medical condition may be deemed “dual purpose” in some cases. These types of items are potentially eligible with a prescription, a doctor’s order, or a letter of medical necessity. For instance, say your doctor recommends a daily, high-dose Vitamin D supplement because recent lab work showed a significant deficiency. Because it’s being used to correct a medical condition, the cost of that supplement is an eligible HSA expense. Other examples may include: • Dietary and weight loss supplements • Fiber supplements • Orthopedic shoes and compression socks • Massage therapy • Snoring cessation aids • Vitamins and herbal supplements
Yes, there are items not covered. Here are some examples of items that generally aren’t eligible for HSA spending, no matter when you tap the account:
HERE ARE A FEW ITEMS NOT HSA-ELIGIBLE
Cosmetics and skin care
Deodorants
Exercise equipment
Household help
Health club dues
Swimming or dancing lessons
Teeth whitening
Fitness programs
Funeral expenses
Hair care or hair removal
To maximize the benefits of your HSA, make sure you’re aware of these four tips:
DO keep records of receipts, invoices, claims and premiums . . . Many insurers and HSA account providers have expense trackers that help organize this proof.
HSA Do’s
DO pay close attention to the calendar
DO keep records of receipts
DO pay close attention to the calendar if you delay signing up for Medicare when first eligible because you’re still working and have insurance through an employer with 20 or more employees. When you later sign up for Medicare Part A, coverage will be retroactive for up to six months. Continue to contribute to an HSA during that time and you could face a 6% excise tax and owe income tax on excess contributions. To avoid the penalty, stop contributing to your HSA at least six months before you plan to enroll in Medicare.
DO keep records of receipts, invoices, claims and premiums to document reimbursement for the qualified medical expenses from your HSA. Many insurers and HSA account providers have expense trackers that help organize this proof. You can snap a picture of the documents from your mobile device or scan them with a printer or scanner.
DON’T mistakenly claim itemized deductions
DON’T ignore your HSA in your estate planning
HSA Don’ts
DON’T mistakenly claim itemized deductions on your tax return for the same medical expenses paid with HSA money. Counting them twice would be considered double-dipping – and could catch the attention of the IRS.
DON’T ignore your HSA in your estate planning. What happens to your account upon your death depends on the person you name as beneficiary. • If your spouse is the beneficiary, he or she becomes the owner of the account – and can fully use it as normal. • If someone other than your spouse is the beneficiary, your HSA is closed – with funds distributed and taxed as ordinary income to the heir. • If your estate is the beneficiary, the value of the HSA will be included in your final income tax return.
