Using a Health Savings Account in Retirement

Why it behaves differently

Every other retirement account gives you one tax break or the other. A traditional IRA shelters the contribution and taxes the withdrawal. A Roth does the reverse. A health savings account does both, provided the money comes out for a qualified medical expense.

That makes it unusual enough to be worth planning around rather than treating as a spending account for this year's prescriptions. Many people fund an HSA while working, pay small medical bills out of pocket, and let the balance invest. By the time they retire it is functioning as a dedicated healthcare account with better tax treatment than anything else they hold.

It also sits outside the calculations that dominate the rest of a retirement plan. A qualified HSA withdrawal is not income, so it does not raise adjusted gross income, does not increase the taxable share of Social Security, and does not move a Medicare premium tier two years later. In a year when every other source of cash does one of those things, that is a genuinely useful property.

What changes at Medicare

Enrollment in any part of Medicare ends your eligibility to contribute to an HSA. Not to use it. The distinction gets lost constantly, and people close or spend down accounts they could have kept.

The balance stays yours. It keeps growing untaxed. It keeps paying qualified expenses tax-free. All that stops is new contributions, including the employer's.

There is a trap on the way in, and it is worth repeating because the cost is real: enrolling in premium-free Part A after 65 is generally backdated up to six months, and applying for Social Security at or after 65 enrolls you in Part A automatically. Contributions made during that backdated window can become excess contributions after the fact. The usual response is to stop contributing roughly six months before you plan to enroll or claim. We cover that and the other enrollment traps in Medicare late enrollment penalties and IRMAA appeals.

What it can and cannot pay

The qualified expense list is broader in retirement than most people expect, with one notable exclusion.

The qualified expense list and the age-based long-term care premium limits are set by the IRS and revised; confirm current rules and amounts with your CPA before relying on any item here.

The Medigap exclusion is the one that catches people. Someone who chose Original Medicare with a supplement, which is the path we describe in Medicare Supplement planning before you retire, can pay their Part B and Part D premiums from the HSA but not the supplement premium. Someone on Medicare Advantage can pay that premium from the HSA. It is a real difference in after-tax cost between two paths that are otherwise compared on coverage and network.

What changes at 65

Before 65, taking money out of an HSA for something other than a qualified medical expense means income tax plus a substantial additional tax on the amount.

From age 65, that additional tax no longer applies. A non-medical withdrawal is simply ordinary income, which is the same treatment a traditional IRA withdrawal gets.

That is worth understanding for what it does to the risk of overfunding. The common objection to building an HSA balance is the fear of dying with money in it that was never needed for healthcare. After 65 the downside case is that the account behaves like a traditional IRA, with the upside that anything used for qualified expenses comes out untaxed. The account is not trapped.

It also has no required minimum distributions during the owner's lifetime, which puts it alongside a Roth IRA and apart from the accounts covered in required minimum distributions. For a household trying to keep adjusted gross income low in a conversion year, an HSA can fund medical costs without adding a dollar to the figure every other calculation keys off.

The receipt question

There is no deadline for reimbursing yourself from an HSA.

If you incurred a qualified medical expense after the account was established, paid it out of pocket, and never reimbursed it from the HSA or deducted it on a return, you can reimburse yourself years later. The account continues to grow in the meantime.

Some households use that deliberately, paying medical costs from cash while working and keeping the receipts, which turns the HSA into a reserve that can be drawn tax-free at a time of their choosing. Whether that is worth the record-keeping is a personal judgment. What is not optional, if you intend to do it, is the records: the burden of showing an expense was qualified and was not previously reimbursed sits with you, and a shoebox of faded receipts twenty years on is not a plan.

If you are going to rely on it, keep the documentation somewhere durable and somewhere your spouse can find it.

What happens at death

The beneficiary designation on an HSA matters more than on almost any other account, because the outcomes are so different.

A spouse named as beneficiary generally takes the account as their own HSA. It keeps its character, keeps growing untaxed, and keeps paying qualified expenses tax-free.

A non-spouse beneficiary generally does not. The account typically ceases to be an HSA on the date of death, and its value becomes taxable income to that beneficiary in that year, with limited offsets. There is no ten-year spreading as there is for an inherited IRA. A sizeable HSA left to a child can land as a single large income item.

That asymmetry is an argument for spending an HSA relatively earlier in a long retirement rather than preserving it as a legacy asset, and for checking that the beneficiary form actually says what you think it says. It is the same point we make about every beneficiary designation in the Illinois estate tax: the form overrides the will.

Serving Burr Ridge

Burr Ridge households come to this practice with a particular version of the healthcare question, usually from people who retired from corporate roles with a high-deductible plan and an HSA balance they were never quite sure what to do with. The village also spans Cook and DuPage counties, so two households a few streets apart can deal with different county assessors and different exemption filing processes, which matters when healthcare premiums and property tax are competing for room in the same annual cash flow.

For Burr Ridge residents the work covers Medicare enrollment and supplement timing, including the HSA contribution cutoff that precedes it, tax-aware withdrawal sequencing in coordination with your CPA, retirement income planning, and investment management. Meetings are at the Palos Heights office.

Richard Casolari, Financial Advisor, Investment Advisor Representative, CFP®, has spent roughly fifty years in financial services. The practice is founder-led, and the work coordinates those pieces into one written plan that is revisited on a schedule.