Can You Withdraw From an HSA After 65?

A Health Savings Account (HSA) is a tax-advantaged savings account for individuals with high-deductible health plans (HDHPs) to pay for medical costs. Contributions are often tax-deductible, funds grow tax-deferred, and withdrawals for qualified healthcare needs are tax-free. For account holders age 65 and over, the rules governing the use of these funds change, introducing new flexibility for retirement.

Withdrawals for Qualified Medical Expenses

After you turn 65, you can continue to withdraw funds tax-free to pay for qualified medical expenses. The Internal Revenue Service provides a comprehensive list of these expenses in IRS Publication 502, which includes costs for dental and vision care, prescription drugs, and medical equipment.

A significant advantage for retirees is using HSA funds to pay for certain insurance premiums without tax. This includes premiums for Medicare Part B, Part D, and Medicare Advantage Plans. It is important to note that you cannot use HSA funds tax-free to pay for Medigap supplemental insurance policy premiums.

You can also pay for out-of-pocket costs like deductibles and copayments under your Medicare plan. Furthermore, funds can cover services that Medicare may not, such as hearing aids or long-term care services.

Withdrawals for Non-Medical Expenses

A major shift in HSA rules occurs when the account holder reaches age 65. At this point, the 20% penalty that applies to withdrawals for non-qualified expenses is eliminated. This allows you to access your HSA funds for any reason, not just healthcare.

While the 20% penalty disappears, any funds withdrawn for non-medical purposes are still subject to ordinary income tax. The amount you take out is added to your gross income for the year and taxed at your marginal tax rate, similar to distributions from a traditional 401(k) or IRA.

This flexibility allows the HSA to function as a supplemental retirement account. While it is often advantageous to reserve the HSA for its tax-free medical purpose, the option to access funds for any expense provides an additional source of liquidity in retirement.

Continued Contributions After Age 65

The ability to contribute to an HSA after age 65 depends on your health insurance, not your age. You can only contribute if you are covered by a qualifying high-deductible health plan (HDHP) and have not enrolled in any part of Medicare.

Since many individuals enroll in Medicare when they turn 65, this is often the point at which HSA contributions must stop. For those receiving Social Security benefits, enrollment in Medicare Part A can be automatic. If you continue working past 65 for an employer with 20 or more employees and remain on their HDHP without enrolling in Medicare, you can continue to make HSA contributions.

In the year you enroll in Medicare, your maximum HSA contribution is prorated. Your eligibility ends on the first day of the month you are enrolled in Medicare. For example, if you enroll in Medicare in April, you could contribute for the first three months of the year, which is 3/12ths of the annual maximum.

Record-Keeping and Tax Reporting

You should keep all receipts, invoices, and explanation of benefits (EOB) statements related to your qualified medical spending. This documentation serves as proof that the distributions were for legitimate medical costs in the event of an IRS inquiry.

Each year you take a distribution from your HSA, your account custodian will send you Form 1099-SA, which reports the total amount you withdrew during the year.

You must then file Form 8889 with your annual tax return. On this form, you reconcile the distributions reported on Form 1099-SA with your actual qualified medical expenses and report which distributions were tax-free.