HSA Retirement Rules for Contributions and Withdrawals

A Health Savings Account, or HSA, functions as both a method for covering current healthcare costs and a supplemental savings vehicle for retirement. Its structure allows for tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. As individuals approach and enter retirement, the regulations governing HSA contributions and withdrawals change significantly.

HSA Contribution Rules Nearing Retirement

As retirement approaches, the rules for contributing to a Health Savings Account become more defined by age and Medicare enrollment. For 2025, individuals with self-only high-deductible health plan (HDHP) coverage can contribute up to $4,300, while those with family coverage can contribute up to $8,550. These limits are set by the IRS and are subject to annual adjustments for inflation.

A provision allows individuals aged 55 and older to make additional “catch-up” contributions of $1,000 annually. This is in addition to the standard contribution limit. If both spouses in a married couple are over 55, each can make a $1,000 catch-up contribution, provided they have separate HSA accounts.

The ability to contribute to an HSA ceases entirely upon enrollment in any part of Medicare. For the tax year in which an individual enrolls in Medicare, their contribution limit must be prorated. For example, if someone enrolls in Medicare with a July 1 effective date, they are eligible to contribute for the first six months of the year, meaning their maximum contribution would be 6/12ths of the annual limit. Applying for Social Security benefits after full retirement age can trigger up to six months of retroactive Part A coverage, which could shorten the HSA contribution window and result in excess contributions.

Withdrawal Rules for Retirees

After an individual turns 65, the rules governing HSA withdrawals offer more flexibility. The primary use of HSA funds remains paying for qualified medical expenses on a tax-free basis. This means money can be withdrawn without being subject to federal income tax. Keeping records, such as receipts and explanations of benefits, is necessary to substantiate that withdrawals were for legitimate medical costs in the event of an IRS audit.

Funds can be used tax-free for many common healthcare needs for the account holder, their spouse, and any tax dependents. Eligible expenses include:

• Medicare Part B and Part D premiums
• Premiums for Medicare Advantage plans
• Dental treatments
• Vision care, such as exams and eyeglasses
• Hearing aids
• Prescription drugs

Premiums for tax-qualified long-term care (LTC) insurance are also a qualified expense, though the IRS sets age-based limits on the amount that can be paid tax-free. For 2025, an individual between ages 61 and 70 can use up to $4,810 from their HSA for LTC premiums. Someone age 71 or older can use up to $6,020.

The rules change for non-medical withdrawals after age 65. While withdrawals for non-qualified expenses before age 65 are subject to both ordinary income tax and a 20% penalty, the penalty is waived for account holders who are 65 or older. After reaching age 65, an individual can take money out of their HSA for any reason, and the distribution will simply be taxed as ordinary income. This feature allows the HSA to function similarly to a traditional IRA or 401(k) for non-medical needs, providing a flexible source of supplemental retirement income.

HSA Inheritance and Beneficiary Designations

The tax treatment of a Health Savings Account after the owner’s death is determined by the designated beneficiary. The consequences differ between a surviving spouse and any other individual or entity named as the inheritor.

If the designated beneficiary is the surviving spouse, the spouse assumes ownership of the HSA, and the account retains its character as an HSA. The surviving spouse can then use the funds tax-free for their own qualified medical expenses. If otherwise eligible, the spouse can also contribute to the account.

For any non-spouse beneficiary, such as a child or relative, the tax implications are less favorable. Upon the owner’s death, the account ceases to be an HSA, and its fair market value becomes fully taxable as ordinary income to the beneficiary in that year. This can result in a significant tax liability for the beneficiary. The beneficiary can reduce the taxable amount by paying for the decedent’s final qualified medical expenses from the account within one year of death.

If no beneficiary is designated, or if the estate is named as the beneficiary, the HSA’s fair market value is included as taxable income on the deceased individual’s final income tax return. This means the tax liability falls upon the estate. Given the distinct tax outcomes, reviewing and updating HSA beneficiary designations is an important part of estate planning.