Is a HSA Worth It If You Are Over 55?
HSA Basics, Potential Savings, and Risks
A Health Savings Account (HSA) may be an option you can use to plan ahead for your future health insurance premiums and other medical expenses, however, is it a good idea if you are over 55? Let's find out.
The use of an HSA with a high deductible insurance plan may help you reduce health insurance premiums and save tax dollars. To be eligible to establish an HSA with a high deductible health insurance plan you must be self-employed, responsible for purchasing your own health insurance plan or work for an employer who offers HSAs as an option.
First, you choose a high deductible health insurance plan that meets HSA eligibility requirements. Since these health insurance plans have high deductibles, the monthly insurance premiums are lower than other alternatives.
Next, you use the money saved (now that you are not paying a higher monthly premium for a low deductible insurance plan) to make deductible contributions to an HSA (subject to deduction limitations). These contributions reduce your taxable income and thus lower your tax bill.
The funds inside your HSA can be used tax-free to pay for eligible medical expenses. In this way, the HSA enables you to pay for medical expenses with money that you never pay income taxes on. Funds withdrawn for non-eligible medical expenses are subject to ordinary income taxes and a 10% penalty tax if you are not 65 or older.
Evaluate costs and savings of an HSA
Here’s how the math worked for one person, whom we'll call Denise, who was switching to an HSA.
With No HSA
Denise paid $596 a month for her health insurance and had a $1,000 deductible. After her deductible, she was still responsible for 20% of her medical expenses up to her out-of-pocket maximum, which was $2,500 a year.
- In a year with no expensive health events, she would pay annual premiums of $7,152.
- In years with an expensive health event, she would pay premiums plus her out-of-pocket max: $7,152 + $2,500 = $9,652.
With an HSA
With an HSA eligible plan, Denise will pay $349 a month and have a $5,500 deductible. After her deductible is reached, the insurance company pays 100% of her medical expenses.
- In a year with no expensive health events, she will now pay annual premiums of $4,188, and she can deduct up to a $3,350 (the 2015 & 2016 single limit) contribution to her HSA account, which will save her money on taxes, and can then be used tax-free for medical expenses that come up.
- In years with an expensive health event, she will pay her premium plus her out-of-pocket max: $4,188 + $5,500 = $9,688.
With the health savings account in healthy years, Denise has the ability to save money that would otherwise be going to the insurance company. She can use that money anytime for medical expenses, or she can let it grow and use it like an IRA after she reaches age 65.
You can try this suite of online HSA calculator tools to help you compare plans and determine if an HSA may be right for you.
Risks of Switching to an HSA Eligible Health Plan
I know one couple who switched to a high deductible HSA eligible plan with a $10,000 a year deductible. She was diagnosed with breast cancer the next year. For years they had to pay the $10,000 deductible out-of-pocket before her remaining annual medical expenses were covered.
As you reach age 55 and beyond, or if you engage in high danger activities, your risk of experiencing an expensive medical event go up. Consider these risks carefully before you switch to a high deductible plan.
Should an HSA Be Used Once You Reach Age 65 and Become Medicare Eligible?
Once you are enrolled in Medicare, you are no longer eligible to contribute to your HSA account. However, funds in your HSA can still be withdrawn tax-free to pay for qualified medical expenses.
In addition, after age 65, funds in your HSA can be withdrawn for non-medical expenses and any withdrawals will be subject only to ordinary income tax.
Where Can You Find HSA Eligible Plans?
Your insurer, or any reputable insurance agent or health insurance company will be able to provide you with a list of HSA eligible plans. Some plans also offer their own HSA accounts. These can come with high fees.
I have my own HSA account which I opened online with HSA Bank. The account offered a decent interest rate, low fees, and debit card access.