Advantages to health savings accounts

Q. I have a health savings account that I’ve been saving the max to, and I almost never use it. When I start getting Medicare, what can I use the funds in the account for? What do I need to know?
— Almost there

A. There are several advantages to health savings accounts (HSA), which are tax-advantaged medical savings accounts.

They can be used to pay for certain medical expenses, and if used for qualified expenses, the withdrawals are taken tax-free, said Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany.

“Qualified withdrawals can be used for out-of-pocket medical, vision, and dental expenses,” he said. “However, an HSA cannot be used to pay for the premiums you pay for your health insurance coverage.”

Green said the contributions you make to an HSA can reduce your adjusted gross income and modified adjusted gross income, making you eligible for better cost assistance while lowering your taxable income.

The money invested in an HSA will grow tax-free and is not “use it or lose” for the depositor.

“The funds invested in an HSA may remain in there for future use or can be withdrawn at any time,” Green said. “These funds may also be withdrawn for non-medical purposes, although a 20 percent penalty will be assessed on the amount withdrawn.”

In addition to the penalty, a non-qualified withdrawal would also require you to pay the necessary taxes.

Because an HSA is not “use it or lose it,” Green said you have several options to consider upon reaching Medicare eligibility.

First, you can use the funds for future out-of-pocket medical expenses penalty- and tax free.

Or, you can withdraw the funds for non-medical expenses penalty-free. You will still be required to pay the taxes on non-medical expense withdrawals, he said.

Or you can rollover your HSA plan into a retirement account, such as an IRA.

“At age 65, you become eligible to withdraw funds from you HSA penalty free for any reason,” Green said. “Since all your medical expenses are not covered by Medicare, many HSA owners over age 65 continue to use their HSA to pay for out-of-pocket medical expenses.”

Green said you are also permitted to pay for some health insurance premiums with your HSA upon reaching age 65. Your HSA funds cannot be used to pay for Medigap insurance premiums, but may be used to pay for Medicare parts A, B, D and Medicare HMO premiums tax-free and penalty-free.

“Finally, it is important to remember that you are eligible to continue using your HSA beyond age 65, but once you are enrolled in Medicare you can no longer contribute to your HSA,” he said.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.