How Can I Use My Health Care Savings in Retirement?

If you find yourself on the verge of retirement, then we’re jealous ... and we have some ideas for that money you may have saved up to help pay for health care expenses, whether it be an HSA, an FSA or an HRA. What you can and cannot do with the balance in these accounts upon retirement depends on which one you’re talking about. Here, we explore the rules that dictate how you can utilize each one after you leave your job (you lucky duck!).  

Health Savings Account 

If you have been contributing to a Health Savings Account (HSA) year after year, you may find yourself with a nice pile of money in your account. Money accumulated in an HSA is yours to keep. But you must stop contributing to your HSA once you leave your job and no longer participate in a High Deductible Health Plan. 

Even though you cannot put any more money into your HSA after you enroll in Medicare, you can continue to withdraw money tax- and penalty-free to pay for medical expenses. You can then use the money in your HSA to pay your out-of-pocket expenses under Medicare (deductibles and coinsurance, plus copays or coinsurance for medications). However, premiums for a Medicare supplemental policy, such as Medigap, are not considered eligible expenses. 

You may use HSA funds to pay the premiums for:  

• Medicare Part A (though most people get Part A for free) 
• Medicare Part B 
• Medicare Part D prescription coverage 
• Medicare Part C (Medicare Advantage) 
• Long-term care insurance 

The IRS has set annual limits on how much you can withdraw tax-free from an HSA to pay for long-term care insurance, depending on your age. If you are: 

• 40 or younger: $430 
• 41 to 50: $810 
• 51 to 60: $1,630 
• 61 to 70: $4,350 
• 71 or older: $5,430 

After age 65, you can also 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 must pay income tax, plus a 20% penalty. But after you turn 65, the money is subject to income tax, but the 20% penalty no longer applies. 

Once you're 65, your HSA is treated like a traditional IRA if you withdraw money for non-medical expenses. A traditional IRA is a retirement account in which the contributions and gains are tax-free, but withdrawals are subject to income tax. And that's exactly how it works with an HSA if you're 65+ and use the money for non-medical expenses. 

Need a refresher? What is a Health Savings Account? 

Health Reimbursement Arrangement 

What about a Health Reimbursement Arrangement (HRA)? That’s a different matter. Just as the saying goes “you can’t take it with you when you die,” you cannot take money in an HRA with you when you leave your job – no matter the reason you leave. The money belongs to your employer. However, there is typically a 90-day period afterward when employees can submit reimbursement requests for expenses incurred during employment. 

Need a refresher? How Does an HRA Work? 

Flexible Spending Account 

Like with an HRA, the money in a Flexible Spending Account (FSA) is not yours to take when you leave a job, and anything left over is forfeited. Your FSA account balance will still be available to you for any eligible expenses incurred while you were still employed, so save your receipts.

However, FSAs are COBRA-eligible, so if you have money left in your FSA account, you may use it to pay for COBRA premiums, and you may continue to contribute to the FSA while you’re on COBRA, according to FSA Store.  

For a Dependent Care FSA, the remaining balance can continue to be used to pay for eligible dependent care expenses until your account balance is depleted or the end of the calendar year, whichever comes first.  

Need a refresher? What is a Flexible Spending Account?