How do HSA contributions affect Social Security benefits?

Asked by: Prof. Garnet Baumbach  |  Last update: January 4, 2024
Score: 4.7/5 (55 votes)

HSAs can reduce taxable income in retirement, which may affect Medicare premiums and the portion of Social Security benefits subject to federal income tax.

When should I stop contributing to HSA before Medicare?

There is no need to stop HSA contributions before your 65th birthday month. You are not yet eligible for Medicare, so there is no “double dipping” of a tax advantage. For example: Someone with a July birthday, who applied for Medicare in April, May, or June, should stop HSA contributions as of June 30th.

Are HSA contributions counted as income?

Contributions, other than employer contributions, are deductible on the eligible individual's return whether or not the individual itemizes deductions. Employer contributions aren't included in income. Distributions from an HSA that are used to pay qualified medical expenses aren't taxed.

Is there a penalty for HSA contributions while on Medicare?

Your contributions after you're enrolled in Medicare might be considered “excess” by the IRS. Excess contributions will be taxed an additional 6% when you withdraw them. You'll pay back taxes plus an additional 10% tax if you enroll in Medicare during your HSA testing period.

How much can I contribute to my HSA the year I turn 65?

Your maximum contribution is determined by adjusting the HSA maximum in accordance with how many months of the year that you were eligible. For example, if you turn 65 in April, you were eligible for the first three months of the year. You can then contribute 3/12 of the HSA annual contribution maximum.

How Medicare and Social Security Can Affect Your HSA Plans

33 related questions found

Can I continue to contribute to my HSA after age 65?

If you are not enrolled in Medicare and are otherwise HSA eligible, you can continue to contribute to an HSA after age 65.

Are HSA contributions subject to Social Security tax?

For employees, their pretax HSA contributions are made directly through payroll deductions and not only lower their overall taxable income (i.e., they may pay less in overall income tax for the year because of it), but those contributions are also not subject to FICA taxes.

Why is my HSA contribution showing as income?

If an HSA is funded by contributions from both the employer and the employee, it will be important to ensure that the total contributions remain within the annual IRS limits. Contributions made in excess of these annual limits may become taxable income to the employee.

Does IRS check HSA accounts?

Verification of expenses is not required for HSAs. However, total withdrawals from your HSA are reported to the IRS on Form 1099-SA. You are responsible for reporting qualified and non-qualified withdrawals when completing your taxes.

How much should I have in my HSA at retirement?

According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2022 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement. Even if you don't have an HSA, it may be prudent to set aside certain assets just to pay for health care.

Should I use HSA before retirement?

You can use your HSA with other retirement accounts to maximize your after-tax retirement income. Saving in an HSA for retirement gives you a tax-advantaged account dedicated to future medical expenses — allowing you the opportunity to avoid dipping into retirement accounts intended for cost-of-living expenses.

Can you contribute to an HSA if you are no longer employed?

∎ Can I contribute to an HSA even if I'm not employed: You do not have to have a job or earned income from employment to be eligible for an HSA – in other words, the money can be from your own personal savings, income from dividends, unemployment, etc.

Do I need to report HSA contributions on my tax return?

When filing your taxes, you are required to file IRS Form 8889 if you (or someone on your behalf, including your employer) made contributions to your HSA, or if you received HSA distributions for the year.

How do I avoid taxes with HSA?

Your contributions may be 100 percent tax-deductible, meaning contributions can be deducted from your gross income. All interest earned in your HSA is 100 percent tax-deferred, meaning the funds grow without being subject to taxes unless they are used for non-eligible medical expenses.

What happens if you don't include HSA on taxes?

In addition to the 20 percent penalty, the IRS will also consider any HSA funds spent on non-qualified expenses as taxable income. This means they must be included as part of your total income when filing your taxes, which could increase the amount you owe or reduce any refund to which you may be entitled.

Which states tax HSA contributions?

Are HSAs tax-deductible at the state level?
  • HSA contributions are taxed by California and New Jersey.
  • These states don't have state income taxes so the state tax benefit is not applicable: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Can high income earners contribute to HSA?

There are no income limits to be eligible to contribute to an HSA although you do need to enroll through your employer and have a high-deductible health insurance plan in order to qualify. Contributions are also 100% tax deductible at all income levels.

Can I roll my HSA into an IRA after age 65?

Rollovers from an HSA to an IRA

HSA funds can't be rolled over into an IRA account. There's also no reason to do so, because you preserve your right to use the funds tax-free for medical costs at any time with an HSA.

Can my spouse contribute to an HSA if I am on Medicare?

Yes, being eligible to contribute to the HSA is determined by the status of the HSA account holder not the dependents of the account holder. Your spouse being on Medicare does not disqualify you from continuing contributions to the HSA up to the family limit, even if they are also covered by the HDHP.

Should I max out my HSA?

Maxing out your HSA each year easily allows your funds to grow over time. Unlike regular savings accounts, an HSA allows you to invest funds in stocks, bonds, and mutual funds.

Does IRS ask for HSA receipts?

The IRS requires that you keep receipts for all your Health Savings Account (HSA) spending. HSA distributions (money taken from an HSA account) are nontaxable, but only when the money is used to pay for qualified medical expenses.

Are earnings on amounts in an HSA are not currently taxable?

Earnings on amounts in HSAs are not taxable. Distributions from an HSA for qualified medical expenses are not includible in gross income; however, distributions made from an HSA that are used for non-qualified medical expenses are includible in gross income and are subject to an additional tax of 20 percent.

What happens to my HSA when I retire?

One benefit of the HSA is that after you turn age 65, you can withdraw money from your HSA for any reason without incurring a tax penalty. You are, however, subject to normal income tax on any non-qualified withdrawals.

What to do with HSA when you leave a company?

If the person leaves their job, the HSA (and any money in it) goes with the employee. They are free to continue using the money for medical expenses and/or move it to another HSA custodian.

Do HSA contributions reduce future Social Security benefits?

HSAs can reduce taxable income in retirement, which may affect Medicare premiums and the portion of Social Security benefits subject to federal income tax.