If you regularly bestow to a health savings account and plan to claim Social Security past your full retirement age, watch out.
That’s because you can no longer provide to an HSA once you’re on Medicare, no matter whether you sign up just for Part A hospital coverage (which is free) or additional parts of the program that command premiums.
While this sounds straightforward enough, complications can arise for people who delay both Social Collateral and Medicare.
Here’s why: When you delay claiming Social Security beyond your full retirement age, you’re generally propositioned a lump sum in retroactive benefits of up to six months, dating no farther back than your full retirement age (which is 66 for uncountable people right now).
If you’re not yet on Medicare when that happens and are contributing to an HSA, there’s the potential for issues.
“The problem is that if you send up c depart the lump sum from Social Security, it triggers Medicare Part A being effective retroactively as well,” said averred financial planner Peggy Sherman, a lead advisor at Briaud Financial Advisors in College Station, Texas. “So if you hightail it contributions to an HSA during that time, you face an excise tax of 6% on those contributions in addition to income taxes.”
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Anyone in that situation should remove those so-called improper contributions and alert your employer to undo any matching contributions made on your behalf, she said.
“That would need to be done by the tax return filing swain for the year it’s happening in,” Sherman said. “If you sign up for Social Security this year, you have to remove those contributions by April 15 of next year to keep away from the tax issue.”
With more people staying in the workforce well into their 60s and 70s, it’s a situation that’s more favourite to crop up as those workers put off claiming Social Security and enrolling in Medicare.
As long as you have qualified health cover through work, you can delay going on Medicare without facing a late-enrollment penalty. This means you can continue giving to your HSA in combination with a high-deductible health plan.
For 2019, the maximum HSA contribution is $3,500 if you have self-only indemnity, and $7,000 for family plans. People age 55 and older are allowed to put in an additional $1,000. The money comes with a triple tax promote: Contributions are deductible, the money grows tax-free and withdrawals are tax-free as long as they are used to pay for qualifying medical expenses.
Putter Social Security also holds appeal: Your benefits grow by 8% each year you delay up until age 70.
The collect sum offered by the government, and retroactive Medicare coverage, depends on how far beyond your full retirement age you are when you claim Communal Security. As mentioned, you can get up to six months’ worth of retroactive benefits.
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For pattern, say your full retirement age is 66 and you tap Social Security three months after your birthday. The government last will and testament offer to give you a lump sum worth those three months of benefits, which would make your junk date retroactive to your birthday. Sign up six months or more after your full retirement age, and you’ll be offered a six-month brook sum for retroactive benefits and effective date.
If you think you’ll accept a lump sum, you need to stop your HSA contributions before that retroactive escort would kick in to avoid the tax complications, Sherman said.
She also pointed out that rejecting the lump sum — and retroactive compelling claiming date — isn’t necessarily a bad idea anyway.
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“If they say we’ll leeway you a lump sum worth six months and you say no, your base benefit will be 4% higher,” Sherman said.
In other guaranties, based on an 8% increase in your base benefits for each year you delay claiming Social Security, the productive date that’s six months later would mean a permanent 4% increase in monthly benefits. If you were to remove the lump sum, your base benefit would be pinned to that earlier date of claiming, making it less.
If your Medicare coverage befits effective in the middle of the year, you can make HSA contributions that are proportional to the time you were still eligible to contribute. That is, each month of eligibility would be 1/12th of the peak amount you can put in.
And of course, while you can no longer contribute to an HSA once you’re on Medicare, you can use the money to pay for premiums, copays, deductibles and any other conditioning medical expense, Sherman said. Also, once you turn 65, there is no longer a 20% penalty if the dough is used for nonmedical expenses.
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