A new legislative proposal would allow Americans to save for health care in a tax-efficient manner well into their 60s — but it might do more harm than good.
Health savings accounts are a helpful tool in saving enough money for medical bills in retirement, but only until a person’s 65th birthday. Once Americans become eligible for and enroll in Medicare, which happens at 65, they’re no longer allowed to contribute to an HSA. There are certain cases where an individual can delay Medicare enrollment and therefore continue saving in an HSA, but improperly deferring enrollment risks accruing penalty fees, is an expensive mistake that lasts a lifetime (not just for the year in which someone made the mistake).
See: HSA accounts: The good news and bad news
Under the current plan, once a person enrolls in Medicare, she is no longer allowed to contribute those pretax dollars, but she can withdraw what she’s saved and earned in that account to pay for health care expenses, including Part B premiums and copayments.
The Health Savings for Seniors Act, actions sponsored by Representative Ami Bera, a Democrat from California, would allow Medicare beneficiaries to continue participating in an HSA. But it would also strip beneficiaries the ability to use money in their HSAs toward their Medicare Part B premiums, which is at least $135.50 a month.
“One of the best things about HSAs are that someone can diligently save in it for 10 to 15 years before retirement, and bank a lot of that money to pay for Part B,” said Danielle Roberts, co-owner of Boomer Benefits, a company that helps older Americans with Medicare insurance. Eliminating this provision would be a disservice to older Americans, she said.
The bill would also charge a penalty for any withdrawals used to pay for nonqualified health expenses. In its current form, account holders can use their savings for any purchases after 65, whether they’re for medical purposes or not, and simply pay an income tax on the withdrawal as they would with most other investment accounts. The bill was only introduced in July, and has to pass through the House, the Senate and the president’s desk before it becomes law.
The opportunity to save in an HSA past 65, and even while enrolled in Medicare, is huge for older Americans, Roberts said — especially considering the fact that many people are living longer, and thus, working longer. “If you were able to continue maxing out and retired at 75, you’d have a significant amount more money to spend on health care,” she said. But these additional provisions to disallow HSA funds to pay for Medicare Part B premiums and thwart individuals from paying for non-health expenses after 65 could place older Americans at a disadvantage, she added.
Also see: Should you fund your HSA at the expense of your 401(k)?
Financial advisers tout HSAs as one of the most beneficial ways to save for retirement. Medical expenses are staggering during this phase of life — the average couple retiring this year at 65 can expect to spend $280,000 on health care, not including long-term care — and HSAs offer a triple-tax benefit, where contributions, investment earnings and withdrawals are all tax-free if used for eligible expenses. Advisers caution investors to contribute as much as they can up to the maximum, if possible, and avoid touching those assets until retirement.
HSAs aren’t feasible for everyone. The maximum contribution to an HSA is $3,500 for single individuals and $7,000 for a family, and accounts are only available to people with high deductible health plans, which aren’t a good option for some families.