Once you retire, healthcare might end up being your greatest monthly expense, surpassing even the amount of money you spend on housing. So it's important to make sure you have plenty of money socked away for future healthcare spending.
You could always pad your 401(k) or IRA to allow for more healthcare spending later in life. But if you're able to contribute to an HSA, then it pays to do so. That's because HSAs offer more tax breaks than 401(k)s and IRAs. If you're going to fund an HSA, though, it's important that you understand how these plans work with Medicare.
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HSA contributions are barred once you're a Medicare enrollee
Medicare eligibility begins at age 65, though you can sign up a few months prior to your 65th birthday to get the ball rolling. Once you enroll in Medicare, you'll have the option to stay on original Medicare, which is parts A and B plus a Part D drug plan, or move to Medicare Advantage, which doesn't require a separate drug plan.
No matter which Medicare option you choose, once you're a Medicare enrollee, you're no longer eligible to contribute money to an HSA. So it's important that you stop those contributions if you're moving from an employer health plan to Medicare.
If you enroll in Medicare after age 65, you're entitled to six months of retroactive coverage. But that means that you should stop putting money into your HSA six months before you expect to enroll in Medicare if you're doing so at a later age than 65.
Your money is still yours to use
While you may not be able to contribute to an HSA once you're enrolled in Medicare, the money you have in an existing plan is yours to use on healthcare costs, including those directly associated with Medicare. For example, Medicare Parts B and D charge enrollees a monthly premium (Part A is free for most enrollees).
Those premiums can be paid for with HSA withdrawals. You can also use your HSA to cover out-of-pocket costs you're liable for under Medicare, like copays for medications and coinsurance for different health services you need.
Should you delay Medicare if you're working and have an HSA?
You may want to. If you have a great health insurance plan through your job -- one that covers 20 or more people -- you can delay your Medicare enrollment without penalty. That gives you additional time to build up an HSA balance. You'll just want to make sure you're pausing your HSA contributions six months before you intend to sign up for Medicare.
Putting money into an HSA allows you to shield some of your income from taxes while allowing you to invest and grow your balance in a tax-free manner. It pays to fund an HSA if your health insurance plan is compatible with one. Just know that once you sign up for Medicare, that will no longer be the case, so you may want to max out those HSA contributions while you can.
