How HSAs Can Help Your Clients Save for Retirement

Medicare premiums and deductibles, including Medicare Parts A, B, D and Medicare HMO premiums, can be covered by HSA funds on a tax-free basis, whether the client pays them directly from their Social Security benefits or they write a check for the premiums. HSA funds cannot be used to pay Medigap premiums. 

Medicare does not cover all types of health care expenses. Some examples of expenses not typically covered by Medicare Parts A and B that can be paid via HSA funds include: 

• Most dental care
• Eye exams that are related to prescribing glasses
• Dentures
• Cosmetic surgery
• Acupuncture
• Hearing aids and related exams
• Routine foot care 

Having a reserve of funds that can be used to specifically cover medical related costs tax-free can provide a nice boost to your client's retirement nest egg. 

Bridging the Gap 

Sometimes your clients enter retirement or semi-retirement prior to being eligible for Medicare. This might occur because they leave their employer early, either voluntarily or involuntarily. In this type of situation, one solution to their health insurance needs might be to take COBRA coverage from their former employer for up to 36 months. 

COBRA coverage is essentially the same health insurance they had with their former employer, only it is considerably more expensive. HSA funds generally cannot be used to pay health insurance premiums. But HSA money can be used on a tax-free basis to cover the cost of COBRA coverage. 

Even if your client doesn't go the COBRA route, HSA money can still be used to cover eligible medical expenses not covered by their health insurance prior to being eligible for Medicare. 

The HSA at Age 65 and Beyond

No additional HSA contributions are allowed once your client begins taking Medicare. However, if they are covered by an eligible employer health insurance plan and not enrolled in Medicare, they can continue to make HSA contributions until they enroll in Medicare. 

Once they hit age 65, money can be withdrawn from the HSA in much the same way as from a traditional IRA if your client needs the money. The withdrawals will be taxed as ordinary income just like with an IRA. The money can stay in the HSA to be used to cover eligible medical expenses as well. There are no RMDs on an HSA. 

HSA Beneficiaries and Estate Planning

Clients can and should designate one or more beneficiaries for their account. If the beneficiary is a spouse, they will own the account upon the account holder's death and have the ability to use the HSA funds to make tax-free withdrawals to cover eligible medical expenses. If the surviving spouse is covered by a high-deductible health insurance plan, they can make pretax contributions to the HSA. 

Ownership does not pass to non-spousal beneficiaries. The money will be distributed to them and taxes will be due on this money. 

Conclusion

HSAs offer another retirement savings option for your clients who are eligible. Their triple tax advantage is unique. They offer benefits while your client is working and into retirement. HSAs can help clients set aside tax-free money that can be earmarked for health care costs in retirement, a retirement expense that continues to grow. 

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