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I’M 64 AND PREPARING to sign up for Medicare next year. I’ve done extensive research, including earning the Retirement Income Certified Professional designation. I’ve also written articles for HumbleDollar on Medicare coverage, Medicare premiums, Medigap and health savings accounts.
In addition, I’ve befriended Medigap salespeople, advised others on which plans to choose, and asked those on Medicare for advice on their experience with the program. I feel as if I’ve been preparing to take the Medicare filing “exam,” and I’m excited to sign up.
I plan on enrolling in traditional Medicare—Part A hospital insurance, Part B doctor services and outpatient coverage, and Part D prescription drug coverage. I’m also purchasing Medigap Plan G, which will pay for my medical expenses after I’ve met my annual deductible. My planning doesn’t stop there, however.
Once I’m enrolled in Medicare, I’ll no longer be eligible to contribute to my health savings account (HSA). My 65th birthday is next June, so I’ll only be allowed to save in my HSA through May 2024. In 2024, the HSA contribution limit will increase to $4,150 for a solo contributor like me. Because I’m over 55, I can add another $1,000, bringing the annual total to $5,150.
Did you know that allowable HSA contributions are pro-rated in the year you enroll in Medicare? Since I’m only eligible to contribute to the HSA for five months next year, I can contribute 5/12th of $5,150, or $2,145. I’ve got around $25,000 in my HSA already, so my final contribution should bring my balance to around $27,000.
I’m saving all I can in my HSA because it’s arguably the best tax-favored account around. The contributions reduce my taxable income. The account grows tax-deferred. And if I use distributions for qualified medical expenses, there are no taxes owed on my withdrawals.
I’ve learned there’s one drawback to HSAs, however. They’re one of the worst accounts to be inherited by a non-spouse. The entire amount is taxable as ordinary income by the recipient when received. There’s no 10-year distribution period to ease the sting, like there is with inherited IRAs.
For this reason, I’d prefer to spend at least some of my HSA balance earlier rather than later and, indeed, I’m thinking about the period before I file for Social Security at age 70. My Part B premiums and my annual Medicare deductible will both be expenses eligible for tax-free HSA withdrawals. Combined, these should cost me $2,345 in 2024. Unfortunately, Medigap insurance is not an eligible expense for an HSA withdrawal.
The good news is that the Medicare premium surcharges owed by higher earners are considered qualified medical expenses for HSA purposes. Single taxpayers who earned an estimated $102,500 or more in 2022, and married couples who earned $205,000-plus, will be hit with the Part B and Part D surcharge in 2024.
From age 65 through 69, I’ll have to pay my Medicare premiums by writing a check because I won’t be receiving Social Security and hence my premiums can’t be deducted from my monthly benefit. Medicare premiums have been rising around 7% a year, so I expect my premiums will exceed $3,000 a year before I reach 70.
Even if I draw down my HSA by an estimated $15,000 over the next five years, I should have enough left in the account to cover routine medical expenses and, I hope, dental expenses, too. When I file for Social Security, I’ll likely stop paying my Medicare premiums from my HSA. Instead, at that juncture, my Medicare premiums will be deducted directly from my Social Security payments.
After age 70, I could keep track of my annual Medicare premiums or other medical expenses to make further non-taxable HSA withdrawals. Or I could donate the remaining account to charity, so my beneficiaries won’t have to pay ordinary income taxes on what’s left over. But that’s a decision for another day.
James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. Check out his earlier articles.
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Thanks for an informative article! The part about using HSA money to pay Medicare premiums before SS and then pausing once SS begins was interesting. I have the exact opposite idea. Once SS begins there’s a potential “tax tornado” that occurs, where most of that income can be taxable and your tax rate explodes. Those are the times you want qualifying nontaxable income sources: Roth IRA and HSA distributions are the primary ones I can use (sadly, muni bond interest doesn’t also qualify).
I suppose if in your situation you can’t avoid it, so be it, but my plan is to avoid having any SS be taxable, and using HSA money to fund expenses will be part of that plan. I’ll start tracking Medicare premiums immediately for that purpose while I collect SS later on.
would love to hear from others if this sounds flawed.
I am 70, retired Dentist of 41 yrs, and I understand your feelings about caring for you mouth in retirement. My Wife and I both had about $24K each in our HSA and use it exclusively for Dental. Fortunately, I have excellent Dental health, having only a few cavities in 70 years. Like “batperson” describes, most retires will spend their Dental money on wear and tear, fixing old, leaking or re-decaying problems. The best way to avoid this is FLOSS EVERY DAY, since most all adult problems start BETWEEN the teeth. This is your best prevention, since your first cavities started years ago. The Dental plans for Medicare will not help much if you have major Dental work needed. Best, like I do, is find a great Dentist who has the in-office plan for 2 free cleanings and all x-rays each year, and 20-25% off any fillings, crowns, implants etc. That will be your best spent money.
I am 70 and the rudest shock we are experiencing is dental expenses. $2K for a root canal, $4K- $5K for an implant etc. etc. The insurance policies are not worth a d***. After paying premiums and deductibles the policies limit you to a maximum benefit of $1- $1.5K annually. We dropped our dental insurance and pay our dentist a fixed amount annually for two clean ups, annual x-ray and a 10% discount for other procedures.
I would be interested in hearing how others are handling dental coverage.
Hi Jim,
Thanks for an excellent article as always.
Would you be able to clarify one aspect of this confusing topic?
Can I use my HSA account to pay for my wife’s Part B premiums?
Word to the wise, when you start spending down on allowable medical/dental expenses, send copies of the receipts with your tax return. I thought you only had to do that if specifically requested, until I got a bill from the IRS for the unpaid taxes on my withdrawals. It was a very small amount due, but I paid the bill immediately, then dug up the receipts I could find, estimated how much of a refund I was owed and sent the whole thing with an annoyed letter telling them they could keep it. They did, and I learned a lesson. Probably you already know this, having done your research. Thanks for the tip on designating anything left to go to charity.
I am very similar to your situation except I live in Illinois. I am curious as to why you did not choose an Advantage program ?
Did it surprise anyone else here that a WSJ feature last month (“The Biggest Mistakes People Make When Picking a Medicare Plan”) concluded that the best choice for most people is a Medicare Advantage plan?
Another small point: you don’t have to pay the medical expenses from your HSA the year they are incurred; you just needed to have incurred them *after* your HSA account was opened. What this means is, for practical purposes, even if, for example, after age 70 you don’t draw the money out of your HSA to pay your part B premiums, all you need to do is keep track of them, for later tax-free withdrawal. That way, you should be able to pile up enough Part B premiums (and maybe other expenses) to draw your full account out in one tax-free shot, if you so desire. The main thing is to keep good records, so if the nice folks at the IRS want to take a peek at your math, you’ll have the figures handy.
It’s interesting that Medigap premiums are not an eligible expense, but Medicare Advantage is and also premiums for health insurance through an employer for retires on Medicare which, in effect, is the same as Medigap coverage.
And the thing is, “health insurance through an employer for retirees” is not the same as employer-provided health insurance. At least, thus sayeth the IRS (and Medicare). It is…something else, although neither of those behemoths can say exactly what. Just part of the IRS’s–and Medicare’s– Land of Confusion, I guess.
The “surcharge” on Part B premiums are eligible because they are premiums.
You might want to hold off on some of the HSA spending on premiums, it might come in handy for Rx and other out of pocket costs in the future.
Not sure why you would give the money away because of concern over taxes for the beneficiaries. It’s like they get to keep 75% of the money or none of it.
I signed up for Medicare and waited until I was age 70 to claim my social security benefit and I chose to write a check for my Medicare part D premium but I was required to pay my part B premium three months at a time. When I turned age 70 the monthly premium was then deducted from my SS benefit. I was overpaid by one month on the last premium I paid by check when the required premium withholding began but the duplicate payment was quickly refunded.
It is my understanding that there are four ways to pay the Medicare premium if you start your Part B coverage before your SS benefit –
4 ways to pay your Medicare premium bill:
There was previously a legislative proposal, the Health Savings for Seniors Act recently (4/7/2022) introduced in the House, bipartisan bill (H.R. 7435), that among other things would have made Medicare part B & D premiums not eligible for reimbursement from a HSA that fortunately did not go anywhere. You may want to keep a watch on possible future changes to this tax law.
I also chose to go with traditional Medicare part B and a plan G for a supplement. As I will take a high cost Rx for life I went with a higher cost preferred drug plan for my tier 4 drug which increased my part D premium but the lower copay has meant an overall lower total drug cost for me.
I believe another important issue to be aware of is the Medicare 6-month lookback for HSA contributions if retiring after age 65.
True, but the six month look back is the maximum look back time period. If one claims starting at exactly age 65 there is no retroactive look back period.
IRS Pub 969 – Beginning with the first month you are enrolled in Medicare, your contribution limit is zero. This rule applies to periods of retroactive Medicare coverage. So, if you delayed applying for Medicare and later your enrollment is backdated, any contributions to your HSA made during the period of retroactive coverage are considered excess.
I keep copies of all HSA eligible expenses I have not reimbursed. Upon my death, can my heirs claim those reimbursements or does it form the basis for the IRA it rolls over into?
An HSA won’t roll over to an IRA. It can stay as an HSA for a spouse beneficiary, but the entire amount (after reimbursing expenses) is taxed in the year of death as ordinary income to a child heir.
They can claim the reimbursements as long as withdrawn within 1 year after death. For me there will be enough moving parts I don’t want my kids to have to become experts on my HSA after I’m gone.
I agree. Too complicated. Leave it to charity unless you feel there’s someone who really needs that money even after paying the taxes on it. Hopefully you will have used most or all of it for its intended purpose.
James, thanks for an excellent article. I just passed my one year anniversary on Medicare, and we are executing our plan step for step with what you describe. In the year before I turned 65 we bought our health insurance from my former company’s subsidized early retirement plan, We chose a high deductible plan and had a few unexpected medical issues that cost us thousands of dollars. My wife also had a smaller HSA so used that for medical costs in the 12 months before I turned 65, and the 18 months before she turned 65. We also used it for some big dental expenses. We are now both on Medicare, and we have started my wife’s SS, so her premiums are withdrawn. I plan to wait to 70 also to claim SS. The only difference is we chose a plan N Medigap policy. That plan has a $20 copay for initial DR visits. The monthly savings was about $50, and seemed to make sense given our relative good health and infrequent doctor visits. We have both had knee replacements under Medicare and the has been the $260 deductible and an initial $20 copay. Best of luck and enjoy your retirement.
The problem with Medigap is that once you are out of the initial sign up period you will, in most states, be subject to medical underwriting if you want to switch plans. My former employer changed its retiree coverage this year and I am currently on a Medicare Advantage plan. I am in the process of switching back to Original Medicare and Medigap as underwriting is waived during the first year on MA and I know I would fail if I wanted to switch later. I expect the MA plan to be down graded over time so am willing to take the financial hit.
I agree with James in preferring Plan G to Plan N. There are no copays, and any excess charges are covered.
Thanks Rick. I too am recovering from some knee surgery but couldn’t wait till age 65. HSA sure comes in handy!
We don’t really know yet what the IRMAA brackets will be in 2024. The $102,500 number sounds a little high.
We don’t know the Official brackets but based on the CPI numbers and estimates I see that number is the best guess.
Thanks for the information. I am in an almost identical situation and close to retirement. I originally started my HSA accumulation when my healthcare plan covered the entire family including my wife and sons. But for the last few years I’ve added to it under an individual healthcare policy. But I can’t use any of it to cover my wife’s eligible expenses?
Good news. You CAN use your HSA to pay for your wife’s eligible expenses.
James, thanks for a clear explanation of this topic.