HSA and Medicare: How to Maximize Your Benefits

A health savings account (HSA) offers a powerful way to save for medical expenses with tax benefits, but its relationship with Medicare can be confusing. When determining your Medicare eligibility, understanding how HSAs work and the rules around their use becomes crucial. This guide explores how HSAs and Medicare intersect and what you need to know to optimize your healthcare savings.

What is a Health Savings Account (HSA)?

A health savings account (HSA) is a tax-favored or tax-advantaged account. It is funded by pre-tax income, and these funds remain untaxed as long as they are used for qualified medical expenses, including health care, dental, and vision care expenses.

HSAs are generally overseen by an employer, or if it is an individual HSA, it is overseen by a bank, credit union, or insurance company.

Benefits of HSAs

By using untaxed dollars in your HSA to pay for qualified expenses, including deductibles, copayments, and coinsurance, you might be able to lower your out-of-pocket health care costs. Learn about more HSA benefits.

Overview of Medicare: Parts A, B, C, and D

Medicare is a federal health insurance program that helps pay for healthcare costs. It's available to people who are 65 or older and to some people under 65 with certain disabilities or conditions.

Medicare is broken out into four parts.

Medicare Part A – Hospital Coverage (inpatient hospital stays, home health care, and skilled nursing facility care).
Medicare Part B – Medical Coverage (outpatient services such as doctor visits, laboratory tests, imaging tests, and preventive screenings).
Medicare Part C – Medicare Advantage (offered by private insurance companies for extra benefits and protection on top of Original Medicare).
Medicare Part D – Prescription Drug Coverage (offered by private health insurance providers - it may be included in Medicare Advantage, or you can purchase a separate Part D plan).

Save up to 80% on prescriptions!

Interaction Between a Health Savings Account and Medicare

Anyone can open a health savings account if their medical insurance plan is a high-deductible health plan (HDHP). However, when you’re enrolled in Medicare, your options change substantially because Medicare is considered insurance and is not a high-deductible health plan.

Many people who age into Medicare eligibility already have an HSA. What do you do with your HSA once you can enroll in Medicare? What is the best legal option for you, and how will it affect your finances? These are important questions to ask as you plan your retirement or help your loved ones plan for theirs. Keep reading to learn more.

Can I Have an HSA and Medicare?

You cannot open an HSA or contribute to an existing HSA once you are enrolled in Medicare. But you can still continue to have an HSA and use the funds for qualified medical expenses.

How HSAs Can Be Used With Medicare

Once you are enrolled in Medicare, health savings accounts are off the table (you cannot open an HSA or contribute to an existing HSA).

But there is no real reason to delay Medicare enrollment when you become eligible for Social Security benefits. Many decide to defer Medicare enrollment if they are still employed and can continue making contributions to their HSA. However, waiting to enroll in Medicare can result in steep penalties. The late enrollment penalty for Medicare Part B alone is 10% for each year after your 65^th birthday and continues for the rest of your life. Find out more about Medicare late enrollment penalties here.

A better approach is to contribute as much as possible to your HSA, including payroll deductions and additional contributions up to the maximum contribution limit if you are able. These payments are tax deductible (you can deduct the amount you deposit in your HSA from your taxable income). Once Medicare coverage kicks in, you should use your HSA funds to pay for qualified healthcare expenses, including Medicare premiums.

Contribution Restrictions Post-Age 65

You are unable to open an HSA or contribute money to an HSA if you have any other insurance other than a high-deductible health plan, including Medicare.

When you become eligible for Medicare at 65, you can no longer contribute to your HSA with Medicare. But you can still make withdrawals for qualified medical expenses.

It can be confusing for consumers to navigate the rules because Medicare is overseen by the Department of Health and Human Services, and HSAs are overseen by the Department of Treasury.

Impact of Medicare Enrollment on HSA Contributions

Here are some points to consider:

Some individuals decide to put off Medicare enrollment in order to continue work and continue before tax contributions to their HSA.
An individual is still able to open an HSA if eligible, despite a spouse enrolling in Medicare.
HSA funds can be used to cover copayments, premiums, prescriptions, and more, despite being enrolled in Medicare.
It is completely legal to use HSA funds to pay for the medical expenses of your spouse and any tax dependents, even if they aren’t themselves HSA eligible.

Financial Implications of HSAs and Medicare

Tax Benefits

You can reduce your medical costs by enrolling in a high-deductible health plan either through an employer or individually. This insurance plan comes with a lower monthly premium but a higher deductible. Talk with your employer or banker about opening a health savings account to help you pay your deductible by using tax-free HSA funds.

An HSA has a triple tax advantage. Contributions qualify for tax deduction. In addition, interest, investment gains, and withdrawals for qualified healthcare expenses are all federal tax-free.

When you are younger, and if you prioritize your health, your medical needs will be minimal. As a result, the funds in your HSA will accumulate until you are a senior, at which point you can enroll in Medicare, stop contributing to your HSA, and use the funds for your Medicare premiums and other qualified expenses.

Upon your death, your HSA funds will be liquidated and distributed to a beneficiary of your choice who will be able to use the funds for any purpose. Keep in mind that non-spouse beneficiaries pay tax on an inherited HSA balance. This is the way that programs are designed for the consumer and how you can best benefit from them.

Common Mistakes to Avoid in HSA Contributions

Using HSA Funds for Unqualified Expenses

If you use HSA funds to pay for something that is not considered a qualified medical expense, for example, Medigap premiums, the money you withdraw for this purpose is taxable and you may have to pay penalties.

Using HSA Funds for Ineligible Individuals

Each HSA is owned by one individual, and the funds can be used by that individual only. However, if you have family coverage in a qualifying HDHP, you can use your HSA to pay for qualifying medical expenses for your family.

Exceeding the Annual Contribution Limit

There are taxes and penalties for exceeding the annual contribution limit to a health savings account. For 2025, the contribution limit is $4,300 for individual coverage and $8,550 for family coverage. You can prorate your contribution by dividing the maximum contribution allowed by 12 and multiplying that number by the number of months you have an HSA-eligible HDHP.

If you are enrolled in a high-deductible health plan (HDHP) that is HSA-eligible and you are at least 55 years old or will turn 55 any time in the calendar year, you can make an additional $1,000 catch-up contribution to an HSA.

Managing Your HSA After Enrolling in Medicare

HSA-Qualified Medical Expenses

You can use pre-tax funds in your HSA to pay for eligible expenses, including health care services such as:

Doctor visit copays
Prescription drug copays
Laboratory and imaging tests
Flu shot
Medical devices such as crutches, hearing aids, or motorized wheelchairs
Dental care (cleaning, braces)
Eye care (eye exams, eyeglasses, contact lenses, eye surgery)

Ways to Optimize Your Healthcare Savings

The best way to maximize your healthcare savings in a health savings account (HSA) is to contribute the maximum or near-maximum that is allowed by the annual contribution limit.

Your approach should be to invest the funds in your HSA more aggressively when you are younger. Shift your investments to a more conservative mix as you grow older when you are looking at withdrawing funds from the account to meet healthcare expenses. Remember, earnings in an HSA are tax-free, so this long-term strategy can help cover significant medical expenses during retirement.

You should know that upon the death of an HSA account holder, a non-spouse beneficiary is liable to pay taxes on the balance by the tax filing deadline. This might bump the beneficiary into a higher tax bracket. A better approach, therefore, is to use the funds in the account during retirement to pay for medical expenses, as opposed to preserving them for your heirs. However, a spouse who inherits an HSA becomes the owner of the account and does not pay any taxes on the balance.

Penalties and Fees

Excess Contributions: The IRS sets certain limits each year on how much you can contribute to an HSA. An excise tax of 6% for each tax year is imposed on HSA owners for any excess individual or employer contributions made to the account that are not removed within the same tax year. For 2025, the contribution limits are $4,300 for individual coverage and $8,550 for family coverage.
Nonqualified Expenses: If you withdraw money or use funds in an HSA for nonqualified expenses before age 65, you will pay ordinary tax on the withdrawal plus a 20% penalty.

FAQs About HSAs and Medicare

What Disqualifies You From Contributing To An HSA?

The following disqualify you from contributing to an HSA (health savings account):

Not being covered by a high-deductible health plan (HDHP) on the first day of the month.
Having other health coverage plans.
Being enrolled in Medicare.
Being claimed as a dependent on someone else’s tax return.
Being an employee covered by a high-deductible health plan (HDHP) and a health flexible spending account (FSA) or health reimbursement arrangement (HRA) that pays or reimburses qualified medical expenses.

Do You Have To Stop HSA Contributions 6 Months Before Medicare?

Yes, you need to stop HSA contributions 6 months before leaving your employer-sponsored plan and applying for Medicare. This coordination is necessary because you will be above 65 years of age at the time of application for Medicare. Given that Medicare Part A has a 6-month retroactive start date, any contributions to an HSA made in the six months before filing the Medicare application are ineligible and may invite a tax penalty.

Here’s an example of the timeline you should follow:

Let’s say you are 67 years old and retiring on June 30. You want Medicare to begin on July 1 to avoid a coverage gap. In this case, you should apply for Medicare at the beginning of April and request a start date of July 1 for Medicare Part B. Social Security has 60 days to set up your new Medicare account, so this will give you enough time. The effective dates will be October 1 of the prior year for Medicare Part A and July 1 for Medicare Part B. You should stop HSA contributions in September of the previous year to prevent excess contributions and tax liabilities.

Note: The 6-month retroactive period applies from the date of application or age 65, whichever is shorter.

If I Retire Before Age 65, Can I Continue Contributing To My Health Savings Account?

Yes, you can continue contributing to your HSA if you retire before age 65 as long as you are enrolled in a high-deductible health plan (HDHP), are not someone’s tax dependent, and are not enrolled in Medicare (Medicare coverage starts at age 65 for most people; however, people under 65 may qualify for Medicare if they have a disability, kidney failure, or ALS).

Note: If you are thinking of early retirement, keep in mind that while you can receive Social Security retirement benefits, you will receive reduced benefits compared to collecting Social Security when you are the full retirement age.

Can I Still Contribute To My HSA After Age 65?

You can still contribute the eligible amount to your HSA after age 65, provided you are not enrolled in Medicare. However, you are no longer eligible to make contributions to an HSA if you are enrolled in Medicare, which typically starts at age 65. In other words, turning 65 by itself does not disqualify you from contributing to an HSA unless you are enrolled in Medicare for health coverage. While enrolled in Medicare, HSA funds previously accumulated can be used for qualified medical expenses as tax-free withdrawals.