Bill and Shirley, retired couple

Bill and Shirley are each 66 and retired. They are highly attuned to health care costs, realizing they may need over $200,000 to cover their out-of-pocket expenses in retirement. Good thing they planned ahead: this year they think they will have more than $20,000 in medical expenses, including their Medicare premiums, drug co-pays, hearing aids and a possible shoulder surgery for Bill.

Because they are both now covered by Medicare, they can no longer contribute to their HSA. But every year since Bill turned 55, he made a yearly "catch up" contribution of $1,000 above their HSA maximum, giving the account a nice cushion when he retired and became Medicare-eligible. Because the HSA is theirs "for life," Bill and Shirley can take tax-free distributions for Medicare specific costs such as:

  • Medicare Part B (outpatient services)
  • Medicare Part D (costs for prescription drugs)
  • Company-sponsored retiree health insurance premiums

What's more, they learned that since Shirley pays for a long-term care insurance policy, their HSA can be tapped into tax-free to pay for these premiums up to a certain amount (indexed each year by the IRS).

Bill and Shirley are very relieved that they planned ahead, and now are enjoying their retirement instead of consumed with worry over health care costs.