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Enrolling in Medicare? These HSA Decisions are Crucial

Some critical and time-sensitive things to be aware of if you contribute to a Health Savings Account and will be enrolling in Medicare.

By Kent Schmidgall, CFP

Retirement is a very exciting milestone. It may also be a time fraught with a dizzying array of decisions, deadlines and duties. As a newly retired acquaintance of mine recently said, while juggling numerous retirement-related tasks, “Retiring ain’t for the faint of heart!”

Kent Schmidgall

Kent Schmidgall

Among the assortment of topics that require attention around the time you retire is the Health Savings Account (HSA). Specifically, there are some critical and time-sensitive things to be aware of if you contribute to an HSA and will be enrolling in Medicare.

Primer

First, a brief primer on the health savings account. The HSA allows you to contribute pre-tax dollars in order to pay for qualified medical expenses and arguably is the greatest tax-advantaged savings vehicle in existence.

First, just like a traditional IRA, contributions are on a pre-tax basis and reduce your taxable income. Second, growth in the account is tax-deferred; again, just like an IRA. Lastly, qualified medical expenses can be paid from HSA funds on a tax-free basis, unlike with a traditional IRA. Once you turn 65, you can withdraw HSA funds penalty-free for non-medical expenses (although income taxes would still apply).

Preference

If you are currently contributing to an HSA and are 65 or older, there are some critical decisions to make related to Medicare. If you are covered under a group health insurance plan and your employer has 20 or more employees, then at age 65 you may choose to file for Medicare Part A and skip Part B. (Part B has a monthly premium, so, the idea goes, why pay for Part B coverage while on a group health insurance plan?)

However, if you would prefer to continue contributing to your HSA, then don’t file for Medicare just yet. Doing so would result in an annual excess contribution penalty of 6%, as HSA contributions are prohibited after enrolling in Medicare. If you do not plan to contribute to an HSA after turning 65, then there is likely not a reason to avoid filing for Medicare Part A when you reach that age. If you are covered by a group health insurance plan, then Part A could provide secondary coverage for, say, an overnight hospital stay.

Peril

There is one pitfall that is very easy to tumble into. If you decide to delay Medicare enrollment past age 65 because, for example, you maintain group health insurance coverage, then it is important to stop contributing to your HSA at least six months before you do plan to enroll. This is because when enrolling in Medicare Part A, you automatically receive up to six months of retroactive coverage (but not going further back than the initial month of Medicare eligibility). Any HSA contributions made during this retroactive period would be ineligible and subject to the excess contribution penalty.

Pruning

This 6% excess contribution penalty is applied annually to any excess contributions and their associated earnings for as long as the excess contribution is in your account. Compound growth is generally a great thing, but less so in this instance! If left unattended, this annual penalty will snowball over time, so it is very important to remove the contribution and associated earnings by the tax return deadline.

In the event that you inadvertently make an excess contribution, you should contact the HSA administrator to determine the appropriate steps for returning the excess contributions and earnings. The returned contributions and earnings will be included as taxable income for the tax year in which they were made. If the HSA funds have already been spent and thus cannot be returned to you, consult with your tax professional regarding the appropriate steps to ensure the correct amount of taxable income is reported on your tax return.

If you are contributing to an HSA and contemplating enrolling in Medicare at 65 or later, be mindful of the rules surrounding each. Doing so will allow you to retire with greater confidence.

About the author: Kent Schmidgall, CFP®

Kent Schmidgall, CFP®, is a Wealth Advisor with Buckingham Strategic Wealth. He resides in southeast Iowa with his wife and three children. His perfect day includes a steaming cup of coffee, a warm fire, and a Dickens novel.

Important Disclosure: The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®. This article is for general and educational information only and is not intended to serve as specific financial, accounting, legal, or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, confirmed the accuracy, or determined the adequacy of this article. IRN-21-2980


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