What Happens to Your HSA When You Retire?

A Health Savings Account (HSA) functions as a tax-advantaged savings vehicle specifically designed for healthcare expenses. It allows individuals to save money on a pre-tax basis, grow it tax-free, and withdraw it tax-free for qualified medical costs. HSAs are available to those enrolled in a high-deductible health plan (HDHP), serving as a mechanism to manage current and future medical outlays. This account provides financial flexibility for healthcare needs.

Using Funds in Retirement

HSA funds can be used for a wide array of qualified medical expenses in retirement. These include common out-of-pocket costs such as doctor visits, prescription medications, dental care, and vision services. The Internal Revenue Service (IRS) outlines specific eligible expenses, encompassing a broad spectrum of healthcare needs.

HSA funds can also cover certain health insurance premiums. This includes COBRA premiums, which provide temporary continuation of health coverage after employment changes, and health insurance premiums paid while receiving federal or state unemployment benefits. Retirees can also use HSA funds for long-term care insurance premiums, subject to annual IRS-defined limits that vary by age. For instance, in 2025, the limit for individuals aged 71 and older is $6,020.

HSA funds can be applied toward Medicare premiums, including Part A (if applicable), Part B, Part D (prescription drug plans), and Medicare Advantage (Part C) plans. However, premiums for Medicare Supplement policies, commonly known as Medigap, are not considered qualified medical expenses for HSA purposes. These distinctions allow retirees to strategically manage their healthcare costs using their accumulated HSA savings.

Taxation of Distributions in Retirement

The tax treatment of HSA distributions changes once an individual reaches age 65. Distributions used for qualified medical expenses remain tax-free, regardless of the account holder’s age. Maintain meticulous records, such as receipts, to substantiate these expenses in case of an IRS inquiry.

Upon reaching age 65, the 20% penalty for non-medical withdrawals is eliminated. Funds withdrawn for non-medical purposes will no longer incur the penalty, though they will be subject to ordinary income tax. This flexibility allows the HSA to function similarly to a traditional Individual Retirement Account (IRA) or 401(k) for general retirement income after age 65.

This unique structure contributes to the HSA’s “triple tax advantage”: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. After age 65, this advantage expands, permitting penalty-free, albeit taxable, withdrawals for non-medical expenses.

HSA and Medicare Enrollment

Enrollment in Medicare significantly impacts an individual’s ability to contribute to an HSA. Once an individual enrolls in any part of Medicare (Part A, Part B, Part C, or Part D), they are no longer eligible to make new contributions. This rule applies even if Medicare Part A coverage is retroactive, which can occur up to six months prior to their application date.

Existing HSA funds can still be used tax-free for qualified medical expenses, including Medicare premiums.

Individuals who delay Medicare enrollment, perhaps because they continue working and are covered by an employer’s high-deductible health plan, can continue to contribute to their HSA. Careful planning is necessary to cease HSA contributions before Medicare coverage begins to avoid potential tax penalties. If one spouse enrolls in Medicare, it does not prevent the other spouse from contributing to their own HSA, provided they remain eligible through an HDHP.