Is an HSA Worth It If You Are Over 55?

HSA Basics, Potential Savings, and Risks

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

HSA Basics

HSAs are a part of 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. HSA funds can be used tax-free to pay for eligible medical expenses.

Contributions to HSAs can be in the form of 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. After age 65, funds in an HSA can be used like an IRA.

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. Those enrolling in Medicare after age 65 are no longer eligible for an HSA.

An HSA Comparison

As an example, consider a traditional health insurance plan that costs $596 per month with a $1,000 deductible. After the deductible, you still are responsible for 20% of medical expenses up to the out-of-pocket maximum, which is $2,500 per year.

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

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

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

Annual premiums add up to $4,188, and up to $3,600 (for self-only coverage) in pre-tax payroll deductions can be contributed to the HSA, as of 2021. (For family coverage, the amount is $7,200.)

HSA funds can be withdrawn tax-free to pay for qualified medical expenses. If contributing the maximum amount to the HSA, total annual expenses would be $7,788. 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. For those who open an HSA in their 20s and have minimal annual medical expenses, this often is not a problem. After several years or even decades, the HSA can become a considerable asset and a major part of a retirement plan.

Those who have medical conditions with expenses that match or exceed HSA contribution limits will have difficulty building value in an HSA, making it less appealing as an option than 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.