Is an HSA Worth It if You Are Over 55?

HSA Basics, Potential Savings, and Risks

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Table of Contents
Table of Contents

A health savings account (HSA) can often be a good option for those who are younger, in good health, and eligible for such a plan. You might want to look at alternatives options for health insurance, however, if you're older than 55, especially if they have medical conditions or prescriptions that will limit the ability to build value in an HSA.

Key Takeaways

  • Health savings accounts (HSAs) can be paired with high-deductible health plans to save money on healthcare and as a way to invest tax-free.
  • The funds in an HSA can be used to cover major health events, but that will diminish their earning potential.
  • People who are young and healthy can use an HSA like a retirement fund, but the elderly and those with greater health needs might not see much benefit.

HSA Basics

HSAs can be paired with high-deductible health insurance plans with low premiums, designed to help save tax dollars. Money saved on lower premiums is contributed to an HSA, which generates earnings much like a retirement account does. HSA funds can be used tax-free to pay for eligible medical expenses.

Contributions to HSAs can be made with pre-tax withholdings from earnings, and distributions for eligible medical expenses also are tax-free. Unused funds roll over each year, increasing the value and interest-earning potential of the HSA. Funds in an HSA can be used like an IRA after age 65.

You must be self-employed and responsible for purchasing your own health insurance plan, or you must work for an employer who offers HSAs to be eligible to establish an HSA with a high-deductible health insurance plan. Those enrolling in Medicare after age 65 are no longer eligible for an HSA.

An HSA Comparison

Consider a traditional health insurance plan that costs $596 per month with a $1,000 deductible. You're still responsible for 20% of medical expenses up to the out-of-pocket maximum, which is $2,500 per year, after the deductible.

Your annual premiums add up to $7,152 per year. An expensive health event can increase the yearly cost by $2,500 to $9,652.

The difference between traditional health insurance and an HSA-eligible plan is only $36 annually, and the HSA is depleted in years with a major health event. But premiums for an HSA-eligible account can be about $3,000 cheaper in years with few or no medical expenses, and the funds contributed to the HSA roll over year after year and continue to earn interest.

Now consider an HSA-eligible plan that costs $349 per month with a $5,500 deductible. The insurance company pays 100% of medical expenses after the deductible is reached.

Annual premiums add up to $4,188, and up to $3,650 (for self-only coverage) in pre-tax payroll deductions can be contributed to the HSA, as of 2022. The amount is $7,300 in pre-tax deductions for full family coverage.

HSA funds can be withdrawn tax-free to pay for qualified medical expenses. Total annual expenses would be $7,788 if you're contributing the maximum amount to the HSA. An expensive health event would add another $1,900 of expenses to reach the deductible and result in annual expenses of $9,688.

Benefits and Risks

It usually takes at least a couple of years to contribute enough to an HSA to match an annual deductible. This is often not a problem for those who open an HSA in their 20s and have minimal annual medical expenses. The HSA can become a considerable asset and a major part of a retirement plan after several years or even decades.

Those who have medical conditions with expenses that match or exceed HSA contribution limits will have difficulty building value in an HSA, making it a less appealing option over traditional insurance plans.

Even those who are healthy and at low risk for significant medical expenses can run into problems if they get into a major accident or develop other unexpected health issues before they build value in their accounts.