HSAs and Medicare: What You Need to Know

By Rebecca Lake. January 26, 2025 · 9 minute read

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HSAs and Medicare: What You Need to Know

Health Savings Accounts (HSA) are tax-advantaged accounts that help you pay for out-of-pocket healthcare expenses. Medicare is government-funded health insurance for those aged 65 and older.

While it’s possible to have an HSA and Medicare at the same time, there are some important rules to be aware of to avoid penalties when you have both. Here’s how Medicare affects an HSA.

Key Points

•   It’s possible to have both an HSA and Medicare, but there are rules regarding Medicare enrollment and HSA contributions.

•   Once enrolled in Medicare, you cannot make new contributions to an HSA, and doing so can lead to IRS penalties.

•   HSA funds can still be used tax-free for qualified medical expenses after enrolling in Medicare.

•   Individuals aged 55 and older can make an additional $1,000 catch-up contribution annually to HSAs until enrolling in Medicare.

•   Maximizing HSA contributions before Medicare enrollment may allow for potential investment growth, which could benefit healthcare expenses in retirement.

Understanding Health Savings Accounts (HSAs)

Health Savings Accounts are tax-advantaged accounts that can be used with high-deductible health plans (HDHP).1 HDHPs are plans that, by law, must set a minimum deductible amount and a maximum out-of-pocket limit for coverage.

In 2024, a plan is considered an HDHP by the IRS when it has a minimum deductible of $1,600 for an individual and $3,200 for a family, and doesn’t exceed $8,050 for an individual and $16,100 for a family. In 2025, a plan qualifies as an HDHP when it has a minimum deductible of $1,650 for an individual and $3,300 for a family, and does not exceed $8,300 for an individual and $16,600 for a family.

When you have an HDHP, you have the option to use an HSA as a way to contribute pre-tax dollars to help cover the higher out-of-pocket upfront costs of these plans. It’s also important to note that HSAs offer investment options such as stocks, bonds, and mutual funds, as well as the possibility for tax-free growth.

If you’re wondering how to set up a health savings account, just remember that being enrolled in an HDHP, either through your employer or self-employed health insurance coverage, is a requirement.

The benefits of an HSA include:

•   Contributions are tax-deductible

•   You and your employer can both contribute, up to annual limits

•   Contributions grow tax-deferred

•   Funds roll over year to year, which is a major difference between an HSA vs. FSA

•   Withdrawals are tax-free when you use them for qualified medical expenses

The IRS sets the annual contribution limits for HSAs. Limits are determined by your coverage type. Here’s how much you could contribute for 2024 and 2025.

2024 HSA Limit

2025 HSA Limit

Individual Coverage $4,150 $4,300
Family Coverage $8,300 $8,550

Annual contribution limits apply to employer and employee contributions. So if you have family coverage and your employer contributes $3,000 to your account for 2024, the most you could contribute is $5,300.

If you’re 55 or older, you can contribute an extra $1,000 a year to your HSA until you enroll in Medicare.

Recommended: What Is a Flexible Spending Account?

HSA Contributions and Medicare Enrollment

Using an HSA for retirement can make sense if you’d like to minimize your out-of-pocket costs for healthcare. But it’s important to properly coordinate your Health Savings Account and Medicare enrollment.

Here’s how the HSA Medicare rules work as you’re looking to manage your healthcare costs in retirement.

How Medicare Affects HSA Eligibility

You can have an HSA with Medicare, but there are some rules. If you enroll in Medicare the month you turn 65, you’ll need to stop contributing to your HSA at the beginning of the month before your 65th birthday month. If you delay enrolling in Medicare until after age 65, a six-month look-back period stipulates that you must stop contributing to your HSA six months before you enroll in Medicare or begin receiving Social Security benefits. Also, you cannot set up a new HSA after enrolling in Medicare.

The reason for these rules? One of the conditions of contributing to an HSA is that you can’t have any other health insurance besides a high-deductible health plan. Thus, since Medicare is health insurance, enrollment automatically disqualifies you from making new HSA contributions.

You can still make withdrawals from your HSA, but according to the HSA rules with Medicare, if you (or your employer) make new contributions to your HSA after Medicare enrollment, the IRS will treat them as excess contributions. Excess contributions are subject to a 6% excise tax penalty, which applies each year those contributions remain in your account.

Managing Your HSA When Transitioning to Medicare

The most important thing to consider with HSA contributions and Medicare is knowing when you need to halt them. If your employer makes contributions to your account for you, you’ll also need to tell them when to discontinue the contributions.

As mentioned previously, if you enroll in Medicare the month you turn 65, you and your employer will need to stop contributing to your HSA at the beginning of the month before your 65th birthday month. That means if your birthday is in July, you should stop contributing at the beginning of June.

If you delay enrolling in Medicare until after age 65, you must stop contributing to your HSA six months before you enroll in Medicare. So, let’s say you plan to enroll in the month you turn 65 and your birthday is September 15th. You would make contributions to your HSA no later than March 15th to avoid a tax penalty.

Recommended: Can You Retire at 62?

Using HSA Funds in Retirement

Like many people, you’re probably wondering how much do you need to retire. Healthcare can be a significant retirement expense, so factoring your HSA into the equation can be helpful.

The more money you have in an HSA, the less you may need to draw from your 401(k), traditional IRA, Social Security benefits, or other assets to pay for medical expenses.

Here are some tips for making the most of HSA funds once you retire.

•   Pay for qualified medical expenses first. The IRS defines what counts as a qualified medical or dental expense in Publication 502. It helps to know what counts and what doesn’t to make sure you’re withdrawing funds tax-free whenever possible.

•   Time non-medical withdrawals carefully. Withdrawing money for anything other than healthcare expenses before age 65 can trigger a 20% tax penalty and you’ll owe income tax on the withdrawal. Once you reach 65, the 20% tax penalty goes away so it’s important to consider the timing if you need to use HSA funds for non-medical expenses.

•   Keep good records. It’s important to keep track of healthcare expenses to get the most mileage out of your HSA. For example, medical billing errors could end up charging you more than you actually need to pay, so it’s wise to review estimates and medical bills carefully before you make a payment.

HSAs vs. Medicare Savings Accounts

A Medicare Savings Account or Medical Savings Account (MSA) is somewhat similar to a Health Savings Account that Medicare enrollees can open. More specifically, an MSA is a special type of savings account you can access through a Medicare Advantage Plan, also known as Medicare Part C.

These accounts combine a high-deductible health plan with a medical savings account. Medicare gives your HDHP a set amount each year for your healthcare expenses, which goes into your MSA. You don’t contribute to your MSA directly; Medicare makes contributions for you. It’s up to you to decide which Medicare-eligible costs you want to use the money to pay for. You can access funds through a checking account, debit card, or credit card, depending on how your MSA is set up.

Recommended: Guide to Health Insurance

Maximizing HSA Benefits Before Medicare

The best way to maximize HSA benefits before enrolling in Medicare is to contribute as much as you can to your account annually, starting in the first year you’re eligible to contribute. The longer you have to invest your HSA funds, the more time your HSA investments may have to grow through the power of compounding returns.

Once you turn 55, remember that you can make an additional $1,000 catch-up contribution each year. That’s an extra $10,000 you could contribute to your plan until you hit your Medicare enrollment window at age 65.

You can also make the most of your benefits by choosing investments in your HSA that offer a combination of solid returns and low fees. If you have multiple HSA accounts with previous employers you may consider consolidating HSAs before enrolling in Medicare so your savings is easier to manage.

Common Mistakes to Avoid

The biggest mistake to avoid with HSAs and Medicare is continuing to contribute after Medicare enrollment. Doing so could trigger a sizable IRS tax penalty, not to mention that correcting excess HSA contributions can be a hassle.

The next biggest mistake is not contributing to your HSA at all in the years leading up to Medicare enrollment. When you don’t contribute anything to your HSA, you miss out on some key tax benefits both now and down the line.

Even if you’re young and healthy now and Medicare enrollment is decades away, you can still benefit from tax-deductible contributions to your HSA. And when you need the money, you’ll appreciate being able to withdraw it tax-free for qualified medical expenses.

The Takeaway

An HSA is a way to help pay for out-of-pocket medical costs and also save and invest money for healthcare needs in retirement. Just be sure to know the rules regarding HSAs and Medicare to maximize your HSA and avoid any penalties.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

🛈 While SoFi does not offer Health Savings Accounts (HSAs), we do offer a range of Individual Retirement Accounts (IRAs) to help with retirement planning.

FAQ

Can I contribute to an HSA after enrolling in Medicare?

Once you enroll in Medicare you cannot make new contributions to an existing HSA or set up a new HSA account. If you continue to make HSA contributions after enrolling in Medicare, the IRS can impose a tax penalty until you remove the contributions from your account.

How can I use my HSA funds after enrolling in Medicare?

Once you enroll in Medicare, you can use your HSA funds to pay for qualified medical expenses and those withdrawals are tax-free. Starting at age 65, you can withdraw HSA funds for any reason without a penalty. You’ll just pay income tax on the withdrawals.

What happens to my HSA if I delay enrolling in Medicare?

Delaying Medicare enrollment doesn’t affect your HSA, though you will still need to stop making HSA contributions at least six months before you enroll. However, it’s important to note that late enrollment in Medicare could trigger penalties, so be sure to research and consider all the possible implications before choosing to delay.


photo credit: iStock/SethCortright
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