Using HSA for Medicare Premiums

Dear Liz: I’m 65 years old. Can I use a Health Savings Account to pay for Medicare premiums? I don’t yet collect Social Security.

Answer: If you have an HSA, you can make tax-free withdrawals to cover your Medicare premiums. Just keep in mind, once you enroll in Medicare, you can’t contribute any more to your HSA.

HSAs are designed for those with high-deductible health plans, allowing them to save for medical expenses. They come with some pretty nice tax perks. Contributions are tax-deductible, the funds grow tax-deferred, and qualified withdrawals are tax-free. Because you can invest the funds and carry over the balance each year, people often view HSAs as a way to bolster their retirement savings.

It’s worth noting that the account owner should ultimately use the funds. If the HSA is inherited by a spouse, they can treat it as their own. Other beneficiaries, though, will face income tax on what remains.

Once you reach the age of 65, you can withdraw from your HSA for any purpose without penalties, but remember, if your withdrawal doesn’t fit the rules for qualified medical expenses, it’ll be taxed.

For instance, you can make tax-free withdrawals to pay for various Medicare premiums: Part A (generally free hospital coverage), Part B (doctor visits), Part C (Medicare Advantage), and Part D (prescription drug coverage). However, any premiums for Medicare supplement insurance won’t qualify, so be prepared to pay taxes on those withdrawals.

Generally, premiums from other health insurance plans aren’t eligible for tax-free withdrawals, with certain exceptions like COBRA coverage payments.

Remember, you can justify tax-free withdrawals for prior year medical expenses only if those expenses are unpaid and incurred after your HSA was opened. Keeping records and receipts is a smart move to show that the expenses qualify and haven’t been reimbursed through other means.