Making the Most of a Health Savings Account Once You Turn Age 65

You’ll face a stiff penalty and taxes if you tap your health savings account for non-medical expenses before the age of 65. After that, the rules change.

Question: Does the penalty for using health savings account money for non-medical expenses disappear entirely at age 65? Does that mean I could withdraw the money after age 65 for a vacation and just pay taxes on the money, like I would with a 401(k)?

Answer: Yes to both questions. You’ll have to pay a 20% penalty plus income taxes if you withdraw money from an HSA for non-qualified expenses before age 65. But the penalty disappears at 65, and you’ll just have to pay taxes on the withdrawal if you use the money for anything other than eligible medical expenses at that point—similar to the tax deferral of a 401(k).

But you may be able to do even better. After age 65, you can use HSA money tax-free for several extra expenses, such as paying your monthly premiums for Medicare Part B and Part D and Medicare Advantage plans. If you have your Medicare premiums paid automatically from your Social Security benefits, you can withdraw the money tax-free from the HSA to reimburse yourself for those expenses. And you can continue to use HSA money tax-free to pay your out-of-pocket costs for medical care and prescription drugs, dental and vision care, a portion of long-term-care insurance premiums based on your age (up to $4,220 in 2019 for people ages 61 through 70, for example) and other eligible expenses. For more information about HSA-eligible expenses, see IRS Publication 969, Health Savings Accounts.

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Plus, there’s an interesting nuance to the law that lets you withdraw money tax-free from an HSA to recoup payments for any eligible medical expenses incurred since you opened the HSA, even if the reimbursement is years in the future. That means if you paid cash for any eligible medical expenses after you established your HSA, rather than tapping the account, you can let the money grow tax-deferred in the HSA and then withdraw it tax-free at any time to recoup your costs. “It’s important for consumers to keep their receipts for their qualified HSA expenses,” says Steve Auerbach, CEO of Alegeus, which provides technology for HSAs.

Many health plans and HSA administrators provide web tools to help you track your bills for qualified medical expenses and note how you paid those bills.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.