What is the tax penalty for contributing to an HSA while on Medicare?

Asked by: Zora Welch  |  Last update: November 13, 2023
Score: 5/5 (38 votes)

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.

What happens if I contribute to an HSA while enrolled in Medicare?

What are the consequences of contributing funds to my HSA while enrolled in Medicare? Medicare beneficiaries who continue to contribute funds to a HSA may face IRS penalties including payment of back taxes on their tax-free contributions and account interest, excise taxes and additional income taxes.

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.

Do you pay tax penalty on HSA after 65?

Once you turn 65, you can also choose to treat your HSA like a retirement account! If you withdraw money from your HSA for something other than qualified medical expenses before you turn 65, you have to pay income tax plus a 20% penalty. But after you turn 65, that 20% penalty no longer applies, so withdraw away!

Do HSA contributions reduce Medicare tax?

Your contributions to an employee's health savings account (HSA) or Archer medical savings account (MSA) aren't subject to social security, Medicare, or FUTA taxes, or federal income tax withholding if it is reasonable to believe at the time of payment of the contributions they'll be excludable from the income of the ...

How to Fix an Overcontribution to an HSA

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Why stop HSA contributions before Medicare?

If you apply after that time, you should plan to stop depositing funds to your HSA up to six months prior to signing up for Medicare because you could face penalties if you continue to contribute. Decide when you plan to retire and when you plan to sign up for Medicare; those may not be the same date.

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.

Why can't I contribute to an HSA after age 65?

At age 65, most Americans lose HSA eligibility because they begin Medicare. Final Year's Contribution is Pro-Rata.

What is the 6 month rule for Medicare and HSA?

This is because when you enroll in Medicare Part A, you receive up to six months of retroactive coverage, not going back farther than your initial month of eligibility. If you do not stop HSA contributions at least six months before Medicare enrollment, you may incur a tax penalty.

What is the maximum HSA contribution in the year I turn 65?

2023 HSA contribution limits

The HSA contribution limits for 2023 are $3,850 for self-only coverage and $7,750 for family coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.

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.

When should I stop contributing to my HSA?

3 times it's okay to stop funding your HSA
  1. Your financial situation has changed. ...
  2. You're getting close to age 65 or you're no longer eligible. ...
  3. You've hit the max contribution limit.

Can I use my HSA to pay for Medicare Part B premiums?

The good news: You can keep using your HSA funds

You can even use your HSA to pay for some Medicare expenses including your Medicare Part B, Part D and Medicare Advantage plan premiums, deductibles, copays and coinsurance. Note: HSA funds cannot be used to pay for Medigap premiums.

What happens when an HSA holder who is 65 years old decides to use the money in the account?

Once you are 65, you can withdraw funds for any reason without paying a penalty, but they will be subject to ordinary income tax. For any reason, but if you are under age 65 and use your HSA funds for nonqualified expenses, you will need to pay taxes on the money you withdraw, as well as an additional 20% penalty.

Is Medicare always retroactive 6 months?

Your Part A coverage will go back (retroactively) 6 months from when you sign up (but no earlier than the first month you are eligible for Medicare). premium for every 12-month period you were eligible for, but did not have, Part A.

What is the 12th month rule for HSA?

"Under the Last Month Rule, if an individual is eligible on the first day of the last month of the tax year (December 1 for most taxpayers), he or she is considered an eligible individual for the entire year.

Can you use your HSA as a retirement account?

In addition to using an HSA for medical expenses, it can also be used as another way to save for retirement. Once you reach age 65, money held in an HSA can be withdrawn and used for any reason, the only catch being that you'll pay ordinary income taxes on withdrawals not used for qualified medical expenses.

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.

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.

Why am I not getting a tax break for my HSA?

If you use the health savings account (HSA) to pay your medical expenses then you do not get to itemize medical deductions for the same expenses. However, if you have enough medical expenses not paid with the HSA you may be able to claim them as an itemized deduction.

Is it better to contribute to HSA pre or post tax?

Reduce taxable income - HSA contributions through payroll are made pre-tax, which lowers tax liability on paychecks. Manual contributions are tax deductible when filing taxes each year. Tax-free earnings - Interest growth earned on HSA funds is never taxed.

Do HSA contributions reduce 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.

Is Medicare going up in 2023?

For 2023, the Part A deductible will be $1,600 per stay, an increase of $44 from 2022. For those people who have not worked long enough to qualify for premium-free Part A, the monthly premium will also rise. The full Part A premium will be $506 a month in 2023, a $7 increase.

How much will Part B go up in 2023?

The Centers for Medicare & Medicaid Services (CMS) has announced that the standard monthly Part B premium will be $164.90 in 2023, a decrease of $5.20 from $170.10 in 2022.

Can I contribute to an HSA after year end?

Forgetting that HSA contributions can be made until the tax deadline of the following year. One of the great things about HSAs is that contributions can be made retroactively for the previous tax year before the federal tax deadline.