Is an HSA Worth It If You Are Over 55?

A health savings account (HSA) can be a good option for those who are younger, in good health, and eligible for such a plan, but you might want to look at other options for health insurance if you're older than age 55 or if you have health conditions or need prescriptions that will prevent you from building value in an HSA.

HSA Basics

HSAs can be paired with high-deductible health insurance plans that often come with low monthly premiums, which can help you save tax dollars. The money you save on the lower premiums can be saved to an HSA instead, which generates earnings much like a retirement account. HSA funds can be used tax-free to pay for eligible medical expenses.

Contribution Limits for HSAs

For those with self-only insurance coverage, you can contribute through tax deductions up to $3,650 in 2022 and $3,850 in 2023. If you have a family insurance plan, you can contribute up to $7,300 in 2022 and $7,750 in 2023.

If you are an eligible individual who is 55 or older at the end of the tax year, you can make an additional contribution of $1,000. For example, if you have self-only coverage in 2022, you would be able to contribute up to $4,650 ($3,650 contribution limit + $1,000 additional contribution).

Requirements and Limitations of HSAs

You must be responsible for purchasing your own health plan if you are self-employed or unemployed, or you must work for an employer who offers HSAs, to be eligible to establish one with a high-deductible health plan. Those enrolling in Medicare after age 65 are no longer eligible for an HSA.

The amount you can contribute to an HSA can depend on several factors, including the coverage from your high-deductible health plan (HDHP), your age, and the date you become eligible.

HSAs vs. Traditional Health Plans

For example, a traditional health plan might cost you $600 per month with a $1,000 deductible. According to the health plan, you're responsible for paying 20% of your medical expenses up to the out-of-pocket maximum after the deductible, which is $2,500 per year.

Your annual premiums would add up to $7,200 per year ($600 * 12 months). If you had an expensive health event, which made you max out the out-of-pocket maximum of $2,500, the total cost for that year would be $9,700.

Now, let's look at an HSA-eligible plan that costs $349 per month with a $5,500 deductible. The insurer pays 100% of medical expenses after the deductible is reached. Your annual premiums add up to $4,188 ($349 * 12 months), meaning the maximum out-of-pocket cost for the year would be $9,688 ($5,500 deductible + $4,188 in premiums).

Let's say you contributed $3,650 or the annual limit to your HSA in 2022. In addition to the total amount of your monthly premiums, you would have paid $7,838 in combined premiums and HSA contributions ($4,188 in total annual premiums + $3,650 HSA contribution). In other words, if you had to withdraw all of the HSA funds to pay for qualified medical costs, the total yearly expenses would be $7,838.

If you had an expensive health event, you would have to pay an additional $1,850 out of pocket to reach your deductible of $5,500 ($5,500 deductible - $3,650 from HSA), which would result in a total out-of-pocket maximum of $9,688.

As a result, premiums for an HSA-eligible account can be nearly $2,000 cheaper in years with few or no medical expenses, and the funds saved to the HSA roll over year after year and keep earning interest.

Benefits and Risks

It can take a few years to save enough money in an HSA to match your annual deductible. That might not be a problem for those in their 20s who open an HSA and have minimal annual medical expenses. The HSA can become a nice asset and a major part of a retirement plan after many years or even decades.

Those who are older or have medical conditions with expenses that match or exceed the HSA contribution limits may have a harder time building value in an HSA, which can make it a less-appealing option than traditional insurance plans.

Even those who are healthy and at low risk for major medical expenses can run into problems if they're involved in and badly injured in a major accident or if they develop other health issues before they build value in their accounts.

Frequently Asked Questions (FAQs)