What Happens to My HSA When I Turn 65?

A Health Savings Account (HSA) serves as a savings tool designed for healthcare expenses, operating with a high-deductible health plan (HDHP). It provides a tax-advantaged way to save for current and future medical costs. Contributions are typically tax-deductible, and funds grow tax-deferred. Withdrawals for qualified medical expenses are entirely tax-free, creating a triple tax advantage. This structure positions HSAs as a valuable component of financial planning for health-related expenditures.

HSA Contribution Rules at 65

Upon reaching age 65, an individual’s ability to contribute to a Health Savings Account changes, primarily linked to Medicare enrollment. Once an individual enrolls in any part of Medicare, whether Part A (hospital insurance) or Part B (medical insurance), they are no longer eligible to make new contributions to an HSA. This rule applies even if the individual continues to be employed and covered by a high-deductible health plan. Contributions cease with Medicare coverage, not merely turning 65.

Medicare Part A enrollment can be retroactive for individuals turning 65. When enrolling in Medicare, especially if receiving Social Security benefits, Medicare Part A coverage can be backdated up to six months. To avoid potential tax penalties on HSA contributions, individuals should stop contributing to their HSA at least six months before their anticipated Medicare enrollment date. This prevents contributions from being made during a period that Medicare retroactively covers, which would render those contributions ineligible.

For those who reach age 65 but choose not to enroll in Medicare, perhaps because they continue working and are covered by an employer’s HDHP, HSA contributions can continue. If an individual remains enrolled in an HDHP and has not yet enrolled in Medicare, they can still contribute to their HSA up to the maximum annual limits. This includes the additional “catch-up” contribution permitted for individuals aged 55 and older. Continuing to build HSA funds in this scenario provides a strategic option for those delaying Medicare enrollment.

Using HSA Funds After 65

After age 65, HSA funds offer expanded versatility for healthcare costs. Account holders can continue to use their HSA funds, tax-free, for various qualified medical expenses. This includes standard out-of-pocket costs such as deductibles, copayments, and coinsurance associated with health plans. Expenses for vision, dental care, hearing aids, and prescription medications also qualify for tax-free withdrawals.

Individuals over 65 can use HSA funds to pay for various Medicare premiums. Specifically, funds can cover premiums for Medicare Part B (medical insurance), Medicare Part C (Medicare Advantage plans), and Medicare Part D (prescription drug coverage). HSA funds can also be applied to Medicare Part A deductibles and coinsurance, even though Part A is often premium-free. This broad applicability to Medicare expenses can reduce an individual’s out-of-pocket healthcare burden in retirement.

While many Medicare-related costs are qualified, premiums for Medicare supplemental policies, commonly known as Medigap plans, are not considered qualified medical expenses for HSA distribution purposes. Understanding this distinction helps account holders manage their funds appropriately. Additionally, HSA funds can be used for long-term care insurance premiums, subject to annual age-based limits set by the Internal Revenue Service. For example, in 2025, these limits range from a few hundred dollars for younger individuals to over six thousand dollars for those aged 71 and older. This provision allows for tax-free payment towards future healthcare planning.

Beyond Medicare and long-term care insurance, HSA funds can also cover other insurance premiums under certain conditions. For instance, COBRA health coverage premiums are considered qualified medical expenses. While the primary intent of an HSA is for medical expenses, individuals aged 65 and older gain flexibility in using their funds for non-medical purposes as well. However, distributions for non-medical expenses will be subject to different tax implications, which is a key distinction from pre-65 withdrawals.

Taxation of HSA Distributions After 65

HSA distribution tax treatment changes once an account holder reaches age 65. Distributions used to pay for qualified medical expenses remain entirely tax-free, just as they were before age 65. This includes covering deductibles, copayments, and the various Medicare premiums previously discussed. The tax-free nature of these withdrawals is a benefit, reinforcing the HSA’s role in funding healthcare needs in retirement.

A key change occurs with non-qualified distributions taken after age 65. Before age 65, any withdrawals not used for qualified medical expenses are subject to both ordinary income tax and an additional 20% penalty tax. However, once an individual turns 65, the 20% penalty tax is waived. Non-qualified distributions are still subject to ordinary income tax, similar to withdrawals from a traditional Individual Retirement Account (IRA) or 401(k). This change provides greater flexibility, allowing individuals to use their HSA as a supplemental retirement savings vehicle without the penalty burden if healthcare expenses are lower than anticipated.

Maintaining accurate records of all medical expenses for which HSA distributions are taken is important for tax reporting. While funds can be withdrawn at any time, documentation is necessary to show distributions were for qualified medical expenses and tax-free. This record-keeping responsibility rests with the account holder. The removal of the 20% penalty after age 65 makes the HSA a more versatile financial tool for seniors, offering an alternative source of income in retirement, albeit subject to income tax if not used for medical costs.