How to Maximize Your Health Savings Account (Part 3)

This is the last article in our HSA series and goes into detail regarding strategies that could be helpful in retirement by taking advantage of the flexibility of your HSA.

As a reminder, your HSA offers three powerful tax advantages:

• Tax-deductible contributions
• Tax-free growth on investments
• Tax-free withdrawals for qualified medical expenses

Treat Your HSA like an IRA

As mentioned in our first article, you can also withdraw funds after 65 for any purpose without penalty, but if it is not used for expenses, withdrawals are taxed like a traditional IRA.  This is a nice benefit because it allows you to take advantage of the first two powerful tax advantages above.

Maximize your Qualified Medical Expenses

To get the most out of your HSA you want to prioritize using withdrawals for qualified medical expenses.

HSA funds can be used tax-free for qualified medical expenses like:

• Doctor visits
• Prescriptions
• Dental and vision care
• Deductibles and copays
• Some insurance premiums (limited exceptions like Medicare, COBRA, LTC insurance within limits)

There are some limited exceptions where HSA funds can be used for premiums without tax or penalty (because the IRS specifically allows them as qualified medical expenses):

1. COBRA continuation coverage — premiums for COBRA after losing a job or other qualifying event.
2. Health coverage while receiving unemployment compensation — if you’re receiving unemployment benefits under federal or state law.
3. Qualified long-term care insurance — up to age-based IRS limits.
4. Medicare premiums (for those 65+) — including Medicare Part B, Part D, and Medicare Advantage (Part C) premiums. However, HSA funds cannot be used tax-free for Medigap (Medicare Supplement) premiums.

If you use HSA money to pay qualified long-term care insurance premiums, the distribution is Tax-free and Penalty-free as long as you stay within the annual age-based limit and the policy meets IRS requirements for “qualified long-term care insurance.”

2026 IRS LTC Premium Limits (Deductible / HSA-Eligible)

The maximum amount you can use tax-free from an HSA each year depends on your age:

If your premium exceeds your age limit, the extra amount is not considered a qualified HSA expense.

Important Notes

• The limits are per person, not per policy.
• If you’re married, you can potentially use HSA funds for your spouse’s qualified LTC premiums (within their age limit).
• The limits adjust annually for inflation.
• The LTC policy must be a tax-qualified contract (most modern LTC policies are).

Defer Medical Reimbursement

This strategy combines the 2 strategies above by 1) prioritizing letting the HSA grow over time (by treating your HSA like an IRA) and 2) using withdrawals for qualified medical expenses in the future.

To do this, you document the qualified medical expense in the current year and defer the HSA withdrawal to a future year.

There is no deadline for reimbursing yourself.  You can take a tax-free HSA distribution this year for medical expenses you paid in a prior calendar year, as long as you follow the IRS timing rules.

An HSA distribution is tax-free if the medical expense:

1. Occurred after your HSA was established, and
2. Has not already been reimbursed (by insurance or another account like an FSA), and
3. Has not been deducted on your tax return in a prior year.

What This Means in Practice

• You can pay a medical bill out-of-pocket in 2023…
• Let your HSA money stay invested…
• And reimburse yourself in 2026 (or later) — completely tax-free.
• As long as the expense happened after the HSA was opened, it qualifies.

You cannot take a tax-free reimbursement for:

• Expenses incurred before your HSA was first opened
• Expenses already reimbursed from another source
• Expenses you claimed as an itemized medical deduction

Many people:

• Pay medical expenses out-of-pocket
• Save receipts
• Let HSA funds grow tax-free
• Reimburse themselves years later (effectively creating tax-free income)

Use Medical Reimbursement to Supplement Income in Retirement

This final strategy emphasizes using the Defer Medical Reimbursement strategy to supplement income while keeping Modified Adjusted Gross Income (MAGI) low.

When you take distributions from an HSA for qualified medical expenses, they are tax-free meaning they are not included in your taxable income or MAGI.  This is important in retirement because MAGI determines eligibility for health care subsidies, IRMAA, and other things like the new Senior Deduction in OBBBA.

If you need or want the option to manage your income in retirement to optimize your benefits or minimize your taxes, deferring reimbursements for qualified medical expenses from your HSA is a good way to create tax-free income completely controlled by you, when you need it.

Source: www.irs.gov

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.