Tax-free withdrawals for Medicare expenses
You are not taxed on HSA money you use to pay for medical expenses at any age, such as your health insurance deductibles, copayments and prescription drug costs, and over-the-counter drugs free purchased after January 1st. 1, 2020. You can also make tax-free withdrawals for dental and vision care, hearing aids, and other eligible expenses not covered by insurance. And you can withdraw money tax-free to pay eligible long-term care insurance premiums, with the amount based on your age – $1,690 in 2022 for ages 51 to 60, $4,510 for 61 to 70 or $5,640 if you are over 70.
Biggest benefit for retirees: After you turn 65, you can also withdraw money tax-free from the HSA to pay for Medicare Part B, Medicare Part D, and Medicare Advantage premiums for you and your spouse. You cannot use HSA premiums for Medicare Supplemental Insurance (also called Medigap), supplemental health insurance you buy from a private company to pay for health care costs not covered by Medicare, such as copayments, deductibles and health care if traveling outside the US
These costs can add up: the Fidelity study found that the average 65-year-old couple pays $116,570 in Part B and Part D premiums over their lifetime. If you automatically pay Medicare premiums from your Social Security benefits, you can withdraw tax-free money from your HSA to reimburse yourself for these costs. Be sure to keep a record of the premiums you have paid.
After you turn 65, you can also withdraw money from the HSA for non-medical expenses without incurring a 20% penalty, but you will have to pay taxes on those withdrawals. However, if you plan carefully and keep good records, you should have plenty of opportunities to withdraw cash for HSA-eligible expenses and avoid the tax bill, says William Stuart, director of strategy and compliance for Benefit Strategies LLC, a third party. administrator who helps employers provide HSAs.
“Worst-case scenario, the tax treatment is no different than a 401(k). And it may be better if you can withdraw the money tax-free,” he says.
A strategy for accumulating more tax-free money
A quirk of the HSA rules gives you unlimited time to withdraw cash tax-free for all qualifying expenses you’ve incurred since opening the account. If you use other cash for these expenses at that time, you can let the money grow in the HSA for the future and then withdraw it tax-free at any time.
“It’s always better to let your funds grow tax-free and pay yourself back later, and it’s even better if you invest your funds in the meantime,” says Roy Ramthun, president of HSA Consulting Services. .
If you plan to continue to grow the money in the account, make sure your investments match your time frame. Most HSAs allow you to invest in a portfolio of mutual funds for long-term growth, in addition to offering a savings account for short-term expenses.
Keep records of all HSA-eligible expenses you’ve paid out of pocket over the years. You can view eligible expenses at HSAstore.com.
You can also make tax-free HSA withdrawals to pay your health insurance premiums if you lose your job and receive unemployment benefits, or if you continue your employer’s coverage on COBRA after you lose your job. COBRA is a federal law that allows people to continue their employer’s coverage for up to 18 months after losing their job, if they worked for a company with 20 or more employees.
Steven Hamilton, a registered agent in Grayslake, Illinois, who is licensed to represent taxpayers before the IRS, recommends keeping receipts for eligible expenses and explanation of benefits from your insurance company, along with documents showing that you did not deduct the expenses on your tax return or withdraw the money for those expenses from your HSA. (IRS Form 8889 reports HSA distributions each year.) Some HSA administrators, such as Fidelity and the HSA Authority, provide tools that make it easy to track your eligible expenses and whether or not you paid for them with HSA money. HSA.
Being able to withdraw money tax-free from your HSA can help diversify your retirement income tax-free (like a Roth IRA), especially if most of your savings are in tax-deferred accounts like traditional IRAs. and 401(k)s. Money you withdraw from an HSA for eligible medical expenses is not included in income calculations that determine whether you are subject to Medicare’s high-income surtax or whether you have to pay taxes on your health benefits. social Security.
