Making Your HSA Work for You

As health care costs continue to climb, more and more people are looking for ways to save money on their medical expenses. One way to do this is to open a Health Savings Account (HSA).

The health savings account (HSA) has grown more and more popular since it was established in 2004. The funds for an HSA come from pre-tax dollars, typically through payroll deductions at work. Also, the money in your HSA grows without being taxed, as long as the fund remains active. You can make withdrawals from your HSA to pay for qualified medical expenses tax-free too, no matter how old you are when you need to use the money. However, there is a caveat: To qualify for an HSA in the first place, you must have a high-deductible health plan; otherwise known as a plan where your insurance company will only start paying after meeting your deductible amount. An HSA is beneficial because any leftover balance gets carried over to the next year, unlike an FSA which requires you to use all the money in your account or else lose it.

There are a few things to keep in mind when using an HSA, however. First, you can only contribute a certain amount of money to the account each year. This amount is set by the government and may change from year to year. Second, you can only use the money in your HSA to pay for qualifying medical expenses. These include things like doctor's visits, prescription drugs, and dental care. You cannot use the money for non-medical expenses, such as vacations or new clothes.

HSAs have a lot of uses for people who are ready to retire or approaching retirement. While you can no longer contribute to your HSA once you join Medicare, your HSAs' balances may still provide some unexpected perks.

The popular belief is that individuals who are over 65 and have a pre-existing HSA balance can use it to pay for Medicare Part A, B, and D premiums and copays. They cannot, however, be used to cover Medigap or Medicare supplement insurance premiums. Another thing to bear in mind, especially for married couples where one spouse is 65 or older but the other is not, is that Medicare premium payments are not considered an eligible medical expense until the enrollee reaches age 65. Ideally, then on this account the holder would be at least 65 years old and the payments would go towards their own Medicare coverage rather than for a younger spouse.

HSA money can also be used to pay for long-term care (LTC) insurance premiums. To be considered a legitimate expense, the LTC policy must only cover long-term care services and must provide benefits when the insured suffers from cognitive impairment or requires assistance with two or more activities of daily living (ADLs). Before using your HSA to pay the premiums, double-check that your LTC policy meets these criteria.

Finally, there is a way to use the funds in your HSA for non-medical expenses. If you have unreimbursed medical expenses from any previous year, you may withdraw an amount equal to those expenses from your HSA account and then use the funds however you wish. The two key requirements are that when the expenses were incurred, you must have already had an open HSA account (this means that eligible expenses can date back as far as 2004 when HSAs were first created), and it's best if you can show receipts for these verified expenses too - just in case the IRS decides they need verification of your withdrawals at some point. The balance in your HSA account must never be close to zero if you want to avoid penalties from the IRS. However, for people 65 or older, withdrawals are allowed for any reason without penalty. But, like traditional IRAs, these non-medical withdrawals will be taxed as ordinary income.

At Moscaret Investment Advisory, we work with retirees and those who are preparing for retirement to design strategies that can help provide a secure, satisfying retirement lifestyle. Reach out to us today.