Signing up for Medicare can have a significant impact on your healthcare coverage and HSA benefits. You don’t want to be stuck with limited coverage (and high out-of-pocket costs) or having an IRS tax liability at the end of the year.
We know you might not have time to review the IRS HSA tax code. Because of this, you might now know the relationship between an HSA and Medicare. Or that HSA-eligibility and contributions are different than HSA usage.
Here is how to stay tax complaint when you sign up for Medicare and still use all the HSA funds you have saved for qualified out-of-pocket medical costs.
HSA Eligibility, Contributions and Medicare
Currently, if you are signed up for Medicare, you are no longer eligible to make HSA contributions. HSA-eligibility is defined by your current healthcare plan. Qualifying HSA-eligible plans must have minimum deductibles of $1,350 for individuals and $2,700 for families. Sadly, Medicare is not an HSA-eligible health plan.
If you signed up for Medicare in 2018, you are eligible for prorated HSA contributions in 2018. To calculate your 2018 your HSA contribution maximum you can use the formula below.
Prorated 2018 HSA-Eligibility Contributions
Please note you can contribute an additional $1,000 per individual if you or your spouse are 55+ this calendar year. But what about the HSA contributions and funds you have already made?
HSA Distributions and Medicare
HSA usage is not defined by eligibility. While you may no longer be able to contribute to your HSA once you enroll in Medicare, you can still invest or pay for qualified out-of-pocket medical expenses with your HSA funds. An HSA is truly a lifetime savings account that is always there for health expenses. Medicare enrollment does not hinder this HSA benefit.
If you want to continue to save that money you can and you might because, after 65 years of age, you can use your HSA, just like a 401k or IRA for anything, not just qualified out-of-pocket medical expenses and simply pay income taxes at that point.
Medicare Retroactive Coverage and Your HSA
One important note, you should aware that Medicare may offer up to 6 months of retroactive coverage once you sign up. Be sure to stop making HSA contributions 6 months before you sign up for Medicare OR be sure to waive the retroactive coverage so that you are not making contributions without being eligible to do so.
Understanding IRS compliant ways to use your HSA once you have signed up for Medicare will ensure you continue to save money on all qualified out-of-pocket medical expenses. Understanding these IRS compliance issues will help you make optimal HSA saving decisions in case you want to contribute more today or invest your HSA funds for the future.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.