The 69 1/2 Solution: Funding Your Health Savings Account to the Natural End

By William G. (Bill) Stuart | Originally posted on LinkedIn for Health Savings Academy

You can fund your Health Savings Account forever. But there is a natural limit. And a quirk in federal rules reduces that time frame.

There is no universal "right age" or "right circumstance" that triggers your enrollment in Social Security or Medicare at a certain age. And I'm certainly not qualified to deliver good advice on either topic. Too much depends on your health, your own and your family's medical history, your financial situation, your work and marital status, your preferences and interests, your life goals, and other factors that are unique to you.

But as you discuss your plans with a financial or retirement advisor (you have established a relationship rather than trying to wing it, right?), not your barber, pastor, auto mechanic, or cousin who works in human resources, you should factor into your plans how long you want to continue to remain eligible to fund your Health Savings account.

Let's look at some key life milestone birthdays to determine how decisions you make then can disqualify you from future contributions.

Warning: Age 62

You won't immediately lose your eligibility to fund your Health Savings Account by beginning to collect Social Security benefits as early as age 62. You will, however, start the countdown clock ticking if you, like more than half of all Americans, begin to tap your Social Security benefit before age 65.

When you turn age 65 and are collecting Social Security benefits, you're automatically enrolled in Medicare Part A and Part B. You can waive Part B coverage, which many working seniors (people age 65 or older who remain employed) enrolled on their company's or spouse's company's plan do, because they pay a monthly premium of at least $174.70 for this coverage. You can't disenroll from Part A, however, if you're collecting Social Security benefits. Most Americans pay no premium for Part A coverage.

Age 62 to age 65 is an important decision span because when you're covered by any Part of Medicare, you can't make any additional contributions to your Health Savings Account beginning with the month that you turn age 65.

Warning: Age 65

You become eligible to enroll in Medicare effective the first day of the month that you turn age 65 (or the prior month if your birthday is on the first day of a month). You're entitled to a seven-month Initial Enrollment Period (from three months before your 65th birthday month to three months after) during which you can sign up for Medicare without the risk of any late-enrollment penalties. Also, if you choose traditional Medicare (Part A and Part B, versus a Medicare Advantage plan), you can enroll on a Medicare Supplement plan that, in most states, guarantees acceptance, regardless of your health status, during this period.

This is an important decision point because you can't fund a Health Savings Account during any month that you're enrolled in disqualifying coverage, including any Part of Medicare. If you delay enrollment and remain eligible to fund your account, you can contribute up to $5,150 (self-only coverage) or $9,300 (family plan) in 2024. At a 30% marginal tax rate, you save between $1,600 and $2,800 in taxes. And you'll have a larger balance on which to draw to reimburse qualified medical expenses (including Medicare premiums) tax-free in retirement.

If you enroll on Medicare, you avoid potential penalties that Medicare may impose on late enrollment. If you're not covered on your own or a spouse's employer-sponsored medical plan when you transition to Medicare after age 65, you'll pay a permanent 10% premium surcharge for every 12 months of your group-coverage gap when you enroll in Part B. In other words, if you delay enrolling in Medicare until age 67 and don't have group coverage from age 65 until then, you'll pay a permanent 20% Part B premium surcharge. The 2024 Part B premium is $174.70. a 20% surcharge brings the premium to about $210. As premiums rise in the future, the dollar figure associated with that 20% surcharge increases as well.

If your prescription-drug coverage isn't as good as Medicare's beginning with the month that you turn age 65 - even if you're enrolled on a group plan - you pay a permanent premium surcharge equal to 1% of the Part D national base beneficiary premium. In 2024, that figure is just under $35. In other words, if your drug coverage isn't as good as Medicare's for those same 24 months above, your permanent surcharge is about $8.40 per month. That extra amount will be added to your Part D premium every month. Premiums vary because private insurers offer Part D coverage. The 2024 average is $55.50 monthly, so your surcharge would bring that monthly premium to about $64. As the national base beneficiary premium rises annually, so does the surcharge.

You can avoid these penalties if you remain covered on a group plan with prescription-drug coverage at least as rich as Medicare's (Part D). But even if you can't avoid the Part D surcharges, additional years of tax savings and accumulating greater Health Savings Account balances may more than offset the extra premiums that you'll have to pay. You’ll have to do the math.

Warning: Age 67

People born in 1960 and later (it’s 66 years and eight months for 1958ers and 66 years and 10 months for 1959ers) achieve their Social Security full retirement age when they turn age 67. For those who haven't enrolled yet in Social Security, this is another milestone date. Its most important feature is that, if you continue to earn income, your Social Security benefits aren't reduced by earned income. In other words, Bill Gates, age 68, can collect his full Social Security benefit without seeing a portion of his check reduced by offsetting earned income.

This milestone may not be quite as important as you might infer from the label, however. While you can collect your full retirement benefit beginning at age 67, you can increase your monthly benefit by 8% for each year until age 70 that you defer enrollment. So, you can collect 100% of your benefit at age 67, or 108% at age 68, or 116% at age 69, or 124% at age 70.

If you're tempted to begin collecting benefits, continue to ask yourself the same questions that you should be asking from age 62 forward about your health, your goals, your work plans, your desired lifestyle, and your access to other funds and medical coverage. Your decisions should be rooted in knowledge and optimize your financial situation.