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Medical bills tend to be a big expense for retirees. For some, it’s the biggest ongoing expense. That’s why it’s so important to save up in advance.
In that regard, you have a choice. You can always pad your 401(k) or put more money in your IRA. But if you can save for medical expenses in a Health Savings Account (HSA), it’s usually in your best interest to do so.
The great thing about HSA is that it has a 3x tax advantage. HSA contributions are tax-free, and funds that you do not need to withdraw immediately for medical expenses can be invested tax-free. HSA withdrawals are also tax-free as long as they are used to cover eligible medical expenses.
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HSA funds never expire, so it’s a good idea to fund HSA while you’re still active, then leave that money untapped, grow it, and prepare for your retirement. Enough to cover them. However, once you’ve signed up for Medicare, it’s important to know how HSA works. Not knowing the rules can result in severe penalties.
Stop funding HSA when you enroll in Medicare
Medicare eligibility begins at age 65. You don’t necessarily have to sign up for Medicare at that age if you’re still working or on a group health plan, but we encourage you to do so.
For one thing, Medicare may cost you less than a group plan. Also, Medicare Part A, which covers inpatient care, is free in the sense that members are not billed for it. So, around your 65th birthday, you might decide that it makes sense to sign up for Part A only. That way, Medicare can act as secondary insurance in case of hospitalization, and you’ll probably get a tab that primary insurance doesn’t have.
However, any form of Medicare enrollment prohibits HSA contributions. If you know you’re signing up for Medicare, stop funding HSA so you don’t get penalized for donating when it’s not allowed.
You can use your HSA to pay for Medicare
If you enroll in Medicare, even if it’s only Part A, you can no longer fund HSA. You can also use your HSA to pay for your Medicare premiums (which, as mentioned above, may not apply to Part A, but Part B, which covers outpatient care, and Part D, which covers prescription drugs). definitely applies).
If you have money in HSA, you may have much more control over your medical expenses under Medicare. That’s why he recommends funding HSA whenever possible. Be sure to end the practice once your Medicare enrollment becomes official.
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