Although numerous tax-advantaged vehicles are available for retirement savings, health savings accounts, or HSAs, have particular benefits for individuals saving for retirement. Specifically, HSAs offer a “triple tax benefit” that includes tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses. This can allow individuals to save a significant amount that can be withdrawn tax-free for medical expenses later in retirement. Therefore, for workers looking to boost their savings toward the end of their working years, HSA contributions can be the most tax-efficient vehicle available.

The caveat, however, is that to be eligible to contribute to an HSA, an individual must be covered by a qualifying high-deductible health plan, or HDHP, with no other non-HDHP coverage. And because government-funded health insurance options such as Medicare are not considered qualifying HDHP coverage, enrolling in Medicare—either directly through its website or by applying for Social Security benefits (which automatically enrolls someone in Medicare once they reach age 65)—means that an individual will no longer be eligible to contribute to an HSA.

For retirees, self-employed workers, and others who rely on Medicare as their sole option for health insurance after reaching age 65, this means there is effectively no way to contribute to an HSA after age 65. However, people who continue working beyond age 65 (or whose spouse continues working) and have access to an employer-provided HDHP can continue making HSA contributions as long as they don’t enroll in Medicare or apply for Social Security benefits. And because there’s no age cap on HSA contributions, it’s possible to keep contributing for as long as the person is still working and remains on a qualifying HDHP (although retiring and subsequently enrolling in Medicare will ultimately end HSA eligibility).

Advisors can help their clients who want to keep contributing to HSAs after age 65 by planning strategies that help to preserve their eligibility and maximize the amount they can contribute. For instance, if someone has applied for Social Security benefits and inadvertently enrolled in Medicare (which would make them ineligible for HSA contributions), they may be able to withdraw their Social Security application within 12 months and cancel their Medicare coverage to restore their eligibility—although doing so would require paying back any Social Security benefits received.

Additionally, when married couples have one spouse with HDHP coverage, the other spouse can enroll in Medicare without affecting the HDHP-covered spouse’s HSA eligibility (and if the HDHP covers both spouses, one spouse can still contribute up to the higher family contribution limit even if the other spouse is covered by Medicare and ineligible to contribute to their own HSA).

When someone working past age 65 does decide to retire, they will need to navigate the “six-month rule,” where Medicare coverage is considered to begin six months before applying for benefits. This means the individual will need to plan carefully to calculate their maximum allowed HSA contribution to avoid inadvertently overcontributing to their HSA, since they may become ineligible for contributions well before they actually retire and apply for Medicare.

The key point is that while it’s possible to contribute to an HSA after age 65, the specific rules around HSAs and Medicare introduce an additional layer of planning that’s needed once an individual crosses the age 65 threshold. But given that the point of working past 65 is often to boost retirement savings, and given the tax-efficient benefits of HSAs as a retirement savings vehicle, the extra planning can ultimately be worthwhile because of the additional tax-free savings for those who can navigate the challenges of doing so.

In this two-part article, Ben Henry-Moreland, senior financial planning nerd at Kitces.com, explores the benefits of building HSA savings and ways to preserve HSA eligibility.

Benefits of Building HSA Savings for Retirement

Age 65 has been considered the default age for retirement in the United States going back nearly a century, with the Social Security Act of 1935 setting 65 as the universal retirement age (although numerous state and private pension systems had also used 65 as the age where retirement benefits were triggered even earlier than that). When Medicare was introduced in 1965, it also used 65 as the age at which people qualified for government-provided health insurance benefits.

Over the decades, however, a series of developments—including the raising of the eligibility age for full Social Security benefits to 67, as well as the broad replacement of defined-benefit pension plans with defined-contribution savings plans as the standard workplace retirement plan option—has eroded the notion of 65 as the “normal” retirement age, even though the cutoff date for Medicare coverage remains at 65, and many retirement calculators and financial planning software platforms still use 65 as the default retirement age. In reality, more and more people have been opting to continue working beyond age 65. According to Bureau of Labor Statistics data, the proportion of adults aged 65–74 who were working or looking to work increased to 26.6% in 2022 from 20.4% in 2002 and is projected to increase further to 29.9% by 2032.

People have many reasons for wanting to work beyond age 65, from the sense of purpose that work brings into their lives to the social relationships it provides to the simple desire to have an ongoing routine from day to day. But one of the most common reasons that people continue to work is the desire to better set themselves up financially for retirement. Many consider those last few working years as a final opportunity to boost their savings and alleviate fears of outliving their retirement savings (especially as life spans have increased on average since the days when 65 was the default retirement age, requiring one’s savings to be stretched over a greater number of years). A few more years of earning income gives workers one last chance to top off the tank, as it were, and feel more secure in their financial situation going into retirement.

Workers have many options for building their savings in the years before retirement, from workplace 401(k) plans to tax-advantaged plans like traditional and Roth IRAs to standard taxable brokerage accounts. But one of the most powerful tax-advantaged savings vehicles that one can contribute to during their working years is the health savings account.

For eligible individuals, HSAs have three key tax benefits:

• Contributions to the HSA are tax-deductible for eligible individuals (up to $3,850 if they’re covered by a self-only health insurance plan or $7,750 if they have family coverage for 2023, or $4,150 for self-only and $8,300 for family coverage in 2024, plus an additional $1,000 catch-up contribution for eligible individuals age 55-plus).
• Assets in the HSA can be invested, and any growth and income earned on the funds is tax-deferred.
• Withdrawals from the HSA at any point are tax-free if they are used to pay or reimburse the account owner for eligible medical expenses.

The upshot of HSAs’ so-called “triple-tax benefit” for people saving for retirement is that an individual can make a tax-deductible contribution in one year, invest the assets in the account to increase potentially over many years, and, as a result, have a bucket of savings that can be withdrawn tax-free to spend on medical expenses in retirement. When used in this way, HSAs can have both a practical and a psychological benefit for retirees. Practically, HSAs can effectively boost retirement savings by providing a more tax-efficient way to pay for medical expenses than other types of accounts like IRAs and taxable accounts. Psychologically, HSAs can satisfy the common itch for mental accounting by literally segregating the funds meant for healthcare costs away from other retirement savings, reassuring retirees that dedicated savings are there to cover their medical costs.

Given that medical expenses tend to creep up as people get older, it makes sense that they would want to contribute as much to their HSAs as possible as they near retirement. This might be because they have gotten a late start on building up their HSA funds and want to pack as much in as possible while they still can, or they simply want to take advantage of the HSA’s tax-advantaged savings to the fullest extent allowed.

HSAs Have Narrow Eligibility Criteria

However, unlike other types of savings accounts like IRAs (to which anyone can contribute as long as they have earned income), HSAs have relatively narrow eligibility criteria that individuals must meet to be able to contribute. Specifically, a person needs to be covered by an eligible high-deductible health plan with a minimum deductible of $1,500 for self-only coverage or $3,000 for family coverage, and a maximum out-of-pocket limit of $7,500 for self-only coverage and $15,000 for family coverage for 2023. An individual can be enrolled in their own health insurance plan (such as through their employer or a federal or state healthcare exchange) or covered by someone else’s plan (that is, covered by their spouse’s employer-provided health insurance or, for nondependent children age 26 or younger, a parent’s health insurance plan), but no matter who ”owns” the insurance, the policy needs to meet the HDHP criteria to allow those it covers to be eligible for HSA contributions.

Along with being covered by an eligible HDHP, however, the additional caveat for HSA eligibility is that a person must also not be covered by any other non-HDHP coverage to be able to contribute to an HSA. In other words, if a person is covered by multiple health insurance policies, they’ll be ineligible to make HSA contributions if any one of those policies includes non-HDHP coverage.

Delaying Medicare Coverage Allows Working Individuals to Keep Contributing to an HSA

The caveat that a person must be enrolled in an HDHP and not enrolled in any non-HDHP coverage comes up most often with government-funded healthcare programs such as Medicare and Medicaid. Because these programs are not considered eligible HDHPs for HSA contribution purposes, being enrolled in either of them will automatically disallow a person from making HSA contributions, even if they’re also enrolled in an HDHP that would otherwise be HSA-eligible.

Most people in the U.S. enroll in Medicare when they turn age 65, which means that, in effect, most people can’t contribute to an HSA after their 65th birthday. For people who are either retired, self-employed, or whose employers don’t offer health insurance beyond age 65, and who can’t be covered under a spouse’s employer-provided plan, Medicare really is the only option for health insurance after age 65, meaning that for those groups, turning 65 effectively drops the curtain on eligibility for HSA contributions.

But there is one group of people who can delay Medicare enrollment (and thus stay eligible to make HSA contributions): those who choose to keep working past age 65 (or whose spouses keep working) and who opt to stay on their employer-provided group health insurance coverage. In this case, it’s possible for someone to continue making HSA contributions, provided that the following conditions apply:

• They remain on their employer’s group health insurance coverage.
• That coverage is an eligible HDHP.
• They don’t enroll in Medicare.

Provided that all of these conditions are met, individuals can keep making HSA contributions for as long as they or their spouse continue to work and remain on their employer’s group coverage.

How Applying for Social Security Benefits Ends Eligibility for HSA Contributions

If someone working past age 65 wants to continue contributing to an HSA, then delaying Medicare enrollment is the key. This seems easy enough: All that’s needed to delay Medicare enrollment is to simply not enroll in Medicare, right? Except there’s one other important consideration for making HSA contributions after 65, which is that along with not signing up for Medicare, an individual needs to also avoid applying for Social Security benefits, since doing so will automatically enroll them in Medicare and, therefore, end their eligibility to make HSA contributions.

It’s worth taking a moment to explain how this works in more detail. Broadly speaking, Medicare has two parts, Part A and Part B. Part A covers hospital and skilled nursing facility care and usually doesn’t require a monthly premium payment by the enrollee, while Part B covers other necessary medical services like doctor visits, screenings, and treatments and does come with a monthly premium. (There are other types of Medicare coverage, like Part D prescription drug insurance and Part C Medicare Advantage plans, but Part A and Part B are the nonoptional plans that everybody gets and are what we’ll focus on here).

People are eligible to enroll in both Part A and Part B of Medicare at age 65, and there are generally two ways to sign up. The first is to apply via the Social Security website or in a Social Security office. For someone who wants to sign up for Medicare in this way for benefits starting at age 65, they can do so anytime during the initial enrollment period (starting four months before turning 65 and ending three months after). If they’re still working and enrolled in an employer’s (or in their spouse’s employer’s) group health insurance plan, they can wait until after their employment and/or group coverage ends to apply, which they can do during a special enrollment period up until eight months after the last date of their employment or the end of their group coverage (whichever is earlier).

The second way to enroll in Medicare, however, is to sign up for Social Security benefits. If a person is receiving Social Security at least four months before their 65th birthday, they’ll automatically be enrolled in Medicare starting the month they turn age 65. If they apply for Social Security sometime after age 65 (and haven’t already enrolled in Medicare via the first method described above), then they’ll be automatically enrolled in Medicare starting the month after they apply for Social Security benefits.

What’s notable about receiving Social Security benefits after age 65 is that there is no way to delay Medicare enrollment when doing so. Even if a person is working and enrolled in their employer’s group health coverage, they’ll still be enrolled in Medicare if they’re age 65 or older and receiving Social Security benefits. And while it can be possible to delay or drop Medicare Part B coverage after enrolling, there generally isn’t any way to “turn off” Part A once it’s started (other than withdrawing one’s application for Social Security benefits entirely).

For someone who wants to keep contributing to an HSA after age 65, then, the ability to do so depends on not signing up for Medicare or Social Security. Signing up for Social Security after turning 65 triggers Medicare enrollment automatically, which is considered disqualifying non-HDHP coverage for the purposes of eligibility for HSA contributions.

Of course, people who are still working at age 65 and older are presumably still earning income and less likely to need the additional income of Social Security, so it’s reasonable to think that many of those workers would opt to delay applying for Social Security anyway. Especially since people often stand to benefit from waiting until at least their full retirement age (67 for workers born in 1960 and later) to receive their full Social Security benefits, or to delay claiming up to age 70 to receive even higher benefits.

However, as more workers extend their working years past age 65 to 67, 70, and beyond, they may be tempted to believe that there’s nothing to lose in claiming Social Security to receive the supplemental income on top of whatever the individual is earning from working. But if they are also contributing to an HSA, then enrolling in Social Security (and thus also enrolling in Medicare) will cause them to cease being eligible for HSA contributions. And if they end up contributing more than they’re allowed to as a result, then they’ll be forced to withdraw the excess contribution (and any growth attributable to it) or else face a 6% excise tax per year on the excess contribution until it is eventually withdrawn.

In part two of this series, we’ll discuss ways to preserve HSA eligibility and maximize contributions beyond age 65.