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Can I Contribute to an HSA if I'm on Medicare?

Though they're often misunderstood and underutilized, health savings accounts, or HSAs, are among the most valuable savings accounts out there. It's common to liken HSAs to flexible spending accounts, or FSAs, but while the two are similar in that they're accounts earmarked for healthcare expenses, they work very differently.

With an FSA, you must deplete your plan balance year after year, or you risk losing your remaining funds. An HSA, on the other hand, lets you contribute funds that never expire. In fact, the purpose of an HSA is to put in more money than you need in the near term, and then invest your balance for added growth. It's for this reason that HSAs are often regarded as a solid retirement savings tool.

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The beauty of the HSA is that it's triple tax-advantaged. Contributions are made on a pre-tax basis, investments gains aren't taxed, and withdrawals are tax-free provided they're used for qualified medical expenses.

There is, however, one major catch when it comes to HSAs, and it's that not everyone can qualify to contribute to one. To be eligible, you must be enrolled in a high-deductible health insurance plan. Now, the definition of what a high deductible is can change from year to year. For 2019, it means a deductible of $1,350 or more as an individual or $2,700 or more at the family level. For 2020, it means a deductible of at least $1,400 as an individual or $2,800 as a family.

But what happens when you sign up for Medicare as your health insurance? Are you still allowed to fund an HSA once that coverage begins?

Even though Medicare does come with deductibles, you can't contribute money to an HSA once you sign up for it. Therefore, if you have the option to hold off on enrolling in Medicare, it could pay to do so.

Medicare and HSA contributions don't mix

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Medicare eligibility begins at age 65, and your initial enrollment window spans seven months, starting three months before the month of your 65th birthday and ending three months after that month. If you don't sign up on time, you'll risk a 10% penalty on your Part B premiums for life (Part A doesn't typically charge a premium to begin with, so there's no financial hit there if you sign up late).

However, if you're still working and have access to a group health insurance plan through your job, or you're married to someone whose group health plan you're covered under, then you don't have to sign up for Medicare during that initial enrollment period surrounding your 65th birthday. Instead, you'll get a special enrollment period to sign up that begins once you lose your group health coverage or leave your employer -- whichever comes first.

If your group health plan through work doesn't qualify you to contribute to an HSA (meaning, it's not a high-deductible plan), then you might as well sign up for Medicare Part A as soon as you're able. Since you won't be charged a premium, it can only help you to have Part A serve as secondary insurance. But if you are eligible to fund an HSA, then you may want to hold off on Part A for a bit and continue making contributions. That will allow you to not only grow your balance but shield some of your income from taxes during the latter part of your career.

That said, just because you can't fund an HSA while on Medicare doesn't mean you can't use an HSA on Medicare. Those funds are yours to withdraw for healthcare purposes at any stage of life, so you can use them to pay your Medicare premiums, copays, and deductibles. You can also use your HSA to pay for healthcare services not covered by Medicare.

Many seniors jump to sign up for Medicare as soon as they're able, but if doing so prevents you from contributing to an HSA, then you may want to consider delaying enrollment. This especially holds true if you get good coverage from your group health plan and are able to manage your existing deductibles under it.

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