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March 20, 2024 at 02:05 PM
What You Need to Know
- Clients 55 and older can make annual catch-up contributions to HSAs.
- After 65, they can make withdrawals for non-medical purposes without penalty, subject to income tax.
- It's important to understand how HSAs interact (or, rather, don't) with Medicare to avoid expensive mistakes.
To say that employees who are approaching retirement have a lot on their minds is a dramatic understatement.
In the years immediately before retirement, employees who are planning smartly should be thinking about their financial security more than ever. Their concerns, however, are likely different from employees who are decades away from leaving the workforce. Health savings accounts are one type of planning vehicle that’s often overlooked during the pre-retirement planning process.
While most employees are familiar with the triple-tax benefits of the HSA option, the issues that are specific to older employees are often ignored. A full understanding can help pre-retirees feel more confident as retirement nears — and can also help them avoid expensive mistakes when it comes time to enroll in Medicare.
Catching Up With HSAs
Clients probably know that they’re entitled to make higher contributions to their retirement accounts once they reach age 50. They might not know that they can make an additional $1,000-per-year contribution to their HSAs once they hit age 55. This is above and beyond the $4,150 or $8,300 annual contribution limits that apply in 2024.
Of course, clients should also be reminded that there’s no need to spend down their HSA balances each year and that there’s no need to drain their HSA before they retire or enroll in Medicare.
HSA balances accumulate year after year, and as long as the owners have qualified medical expenses, they can withdraw the funds tax-free in a future year. Medicare premiums count as medical expenses for purposes of the tax-free benefit.
Once they reach age 65, they can withdraw HSA funds for non-medical expenses without penalty. Any amounts withdrawn for non-medical reasons, however, are subject to ordinary income taxes.
