Why Older Married Couples Should Open Two HSAs (When They Can)

A Health Savings Account (HSA) is a tax-advantaged account that is used to save money for qualified medical expenses, such as doctor visits, prescription drugs, and hospital stays. Similar to the case with Individual Retirement Accounts (IRAs), older individuals who are HSA-eligible are permitted to make additional “catch-up” contributions of $1,000 annually starting with the year they turn 55. However, many couples forget that both spouses can make these catch-up contributions if they are eligible. This means both spouses must establish and HSA in their own name – they cannot both contribute to the same account owned by one of them.

Here are several reasons why opening two HSAs can be a smart move and some useful tips for older couples:

  • Increased Savings. Having two HSAs can increase the amount of money that a couple can save for healthcare expenses. The maximum contribution to an HSA for 2023 is $7,750 for individuals with family coverage. By having two separate accounts when both spouses are age 55 plus, the couple can maximize their contributions (and their tax deduction) up to $9,750 for 2023 (i.e., $7,750 + $1,000 + $1,000).
  • Start Before You Turn 55. The IRS considers you age 55 for the entire year regardless of when your birthday falls during year. This means you could make your $1,000 “catch-up” contribution as early as January of that year. Consider it an early birthday present!
  • Tax Benefits. Contributions to an HSA are tax-deductible, which can lower the couple’s taxable income. Furthermore, withdrawals from the HSA for qualified medical expenses are tax-free, which can help to reduce the overall cost of healthcare.
  • Penalty-Free Withdrawals After 65. After age 65, HSA funds can be withdrawn for any purpose without incurring a 20% penalty. This means that if one spouse needs to withdraw funds for non-medical expenses, they can do so without incurring a penalty, while the other spouse’s funds remain untouched for medical expenses, even if the other spouse has not yet turned age 65.
  • Paying Medicare Premiums. Many people don’t realize there is a technical rule that prevents you from using your HSA funds tax-free to pay for Medicare premiums unless the account owner is age 65. Since the older spouse will turn age 65 first, it is important to make sure they have sufficient funds in their HSA if they want to pay or reimburse their Medicare premiums from their HSA.
  • Improved Asset Allocation. By having two separate HSAs, couples can potentially improve their asset allocation and invest their healthcare savings in different investment options. This can diversify their investments and reduce the risk of loss in case of a market downturn.
  • Tax-Free Inheritance for Spouses. A spouse is the only person that can inherit your HSA funds tax-free. No one else can realize this benefit. Sadly, some spouses assume they will be the beneficiary of their husband’s or wife’s account; however, unless they are actually named as the beneficiary of the spouse’s HSA, they might have to pay taxes on the inherited funds.

It’s important to keep these things in mind when married couples are both eligible to contribute to an HSA and are covered by an HSA-qualified family plan. When the first spouse turns age 55, make sure that they start depositing $1,000 each year for their catch-up contribution. If the family HSA account is not in their name, they will need to open an HSA in their name so they can start making catch-up contributions ($1,000 per year adds up quickly over 10 years). Then, put a reminder in your calendars in January of the year the other spouse turns 55. They can make their “catch-up” contribution as early as January even if their 55th birthday isn’t until December.

Married couples may be missing out on a great opportunity to increase their HSA balances leading up to retirement. For those age 55 or older, opening two HSAs is definitely better than one, if both spouses are eligible to do so. HSAs offer numerous benefits, especially tax-free savings. By taking these steps, older couples can better prepare for the cost of healthcare in retirement and ensure that they have the financial resources they need to maintain their health and well-being.