What a Medicare Savings Account Actually Is
A Medicare Savings Account (MSA) is a tax-advantaged bank account paired with a high-deductible Medicare health plan. Money you put into the account is not taxed, and you use it to pay medical costs that your plan does not cover—mainly the deductible, copayments, and coinsurance. The account itself works like a health savings account (HSA), but it is only available to people already enrolled in Medicare.
The mechanics are straightforward: you deposit pre-tax dollars, the money sits in a bank account earning interest, and you withdraw it to pay medical bills. Unlike a regular savings account, the money does not count as income for tax purposes, and any interest the account earns is also tax-free. When you turn 65 and enroll in Medicare, you become ineligible for an HSA, but you can open an MSA if you choose a high-deductible plan.
Not all Medicare plans work with an MSA. You must be enrolled in a Medicare Advantage MSA plan—a specific type of Medicare Advantage plan that includes the paired savings account. These plans are offered by private insurers approved by Medicare, and they vary by region and year. Your plan documents will specify the account details: the bank it uses, the interest rate, and any fees.
Key Takeaways
- An MSA is a tax-free savings account that pairs with a high-deductible Medicare Advantage plan to cover out-of-pocket costs like deductibles and copays.
- Money deposited into an MSA is not taxed as income, and interest earned in the account is also tax-free.
- You can only open an MSA if you enroll in a Medicare Advantage MSA plan offered by a private insurer in your area.
- Medicare deposits an initial amount into your MSA each year based on your plan's deductible; you can add your own money up to an annual limit.
- If you switch plans or drop Medicare Advantage coverage, you keep the money in your MSA but cannot add new deposits.
How Medicare and You Fund the Account
When you enroll in a Medicare Advantage MSA plan, Medicare deposits money into your account automatically each year. The amount depends on your plan's deductible. If your plan has a $3,000 deductible, Medicare might deposit $2,850 into your account; if it has a $6,700 deductible, the deposit is larger. The exact amount varies by plan and changes annually, so check your plan documents or call the insurer to confirm what Medicare will deposit for the year.
You can also deposit your own money into the account, up to an annual limit set by Medicare. For 2024, the limit is $4,150 for self-only coverage and $8,300 for family coverage, though these amounts change each year. You can deposit money throughout the year, and any deposits you make are deductible from your taxable income if you file taxes. If you do not use the money in a given year, it rolls over—there is no "use it or lose it" rule, unlike some employer health plans.
The account earns interest at whatever rate the bank offers. Most MSA accounts earn minimal interest, often less than 1 percent annually, but the money is yours and it accumulates. You own the account and the balance, not your insurance company or Medicare.
What You Use the Account to Pay For
You use MSA funds to pay medical costs that your Medicare Advantage plan does not cover when ready. This includes your plan's deductible (the amount you pay before the plan starts paying), copayments (fixed amounts per visit or service), and coinsurance (your percentage of the cost after you meet the deductible). You can also use the account for dental, vision, and hearing services if your plan covers them, and for prescription drug copayments under your plan's drug coverage.
The account can pay for services covered by your plan but not for services your plan excludes. If your plan does not cover acupuncture, you cannot use MSA funds for acupuncture. You also cannot use the account for premiums—neither your plan premium nor your Part B or Part D premiums. Some plans allow you to use MSA funds for certain preventive services before you meet your deductible; check your plan documents to see which services may have access to.
You withdraw money from the account by using a debit card the bank provides, by writing a check, or by submitting a claim to the bank with a receipt. Keep receipts for any medical expenses you pay with MSA funds, because Medicare requires documentation if you are audited. The bank may ask for proof that the expense was medical and covered by your plan.
The High-Deductible Plan Trade-Off
To have an MSA, you must enroll in a high-deductible Medicare Advantage plan. These plans have lower monthly premiums than standard Medicare Advantage plans, but you pay more out of pocket before the plan starts covering costs. The deductible is typically between $2,500 and $6,700, depending on the plan and year. This means you will pay the full cost of most medical services until you reach that deductible—the MSA is designed to help you cover that gap.
The trade-off makes sense if you are generally healthy and do not expect high medical costs in a given year. You pay a lower premium, and if you stay healthy, you keep the unused MSA balance. If you have chronic conditions or expect significant medical expenses, a high-deductible plan may cost you more overall, even with the MSA, because you will spend more out of pocket before the plan's cost-sharing kicks in.
Some MSA plans include coverage for preventive services before you meet the deductible—things like annual wellness visits, screenings, and vaccinations. This varies by plan, so review your plan documents to see which preventive services are covered without a deductible.
What Happens to Your MSA If You Change Plans
If you switch to a different Medicare Advantage MSA plan, you keep the money in your account and it moves with you. The new plan's insurer will take over managing the account, but the balance remains yours. You can continue to use the funds to pay out-of-pocket costs under your new plan. However, if you switch to a plan that is not an MSA plan—such as a standard Medicare Advantage plan or Original Medicare with a Medigap policy—you keep the account and the balance, but you cannot make new deposits. The account becomes a regular savings account at that point.
If you drop Medicare Advantage entirely and return to Original Medicare, the same rule applies: you keep the balance but cannot add new money. You can still withdraw funds to pay Medicare costs, including deductibles, copayments, and coinsurance under Original Medicare. Some people use their remaining MSA balance to pay for Medigap premiums or other out-of-pocket medical costs.
If you move to a different state or your current plan is no longer offered in your area, you will need to choose a new plan. If an MSA plan is available in your new location, you can enroll and keep your existing MSA balance. If no MSA plan is available, you will need to choose a different type of plan and your account will freeze as described above.
Comparing an MSA to Other Medicare Options
| Feature | Medicare Advantage MSA | Standard Medicare Advantage | Original Medicare + Medigap |
|---|---|---|---|
| Monthly premium | Usually lower | Varies by plan | Part B premium + Medigap premium |
| Deductible | High ($2,500–$6,700+) | Low or none | None with full Medigap coverage |
| Savings account | Yes, tax-free | No | No |
| Out-of-pocket maximum | Yes, federally set | Yes, varies by plan | No maximum |
| Best for | Generally healthy people who want to save on premiums | People who want predictable costs and lower deductibles | People who want maximum coverage and no surprises |
An MSA plan appeals to people who are healthy, do not expect high medical costs, and want to lower their monthly premiums. The savings account lets you build a reserve for future medical expenses, and any unused balance stays with you. A standard Medicare Advantage plan works better if you have ongoing medical needs or prefer lower deductibles and more predictable costs. Original Medicare with Medigap offers the broadest coverage but typically costs more in combined premiums.
Frequently Asked Questions
Can I use my MSA to pay for prescriptions?
Yes, if your Medicare Advantage MSA plan includes prescription drug coverage (Part D). You can use MSA funds to pay your drug copayments and coinsurance. If your plan does not include drug coverage, you cannot use the MSA for prescriptions. Check your plan documents to see whether drug coverage is included.
What happens to my MSA balance when I turn 65 or reach Medicare age?
Your MSA does not close when you turn 65. You can keep the account open and use it to pay Medicare costs for as long as you are enrolled in a Medicare Advantage MSA plan. If you switch to a different type of plan later, the account freezes but the balance remains available for future medical expenses.
Can I withdraw money from my MSA for non-medical expenses?
Technically yes, but you will owe income tax on the withdrawal plus a 20 percent penalty if you are under 65. Since most MSA holders are 65 or older, the penalty does not explore, but you still owe income tax on non-medical withdrawals. Keep receipts for all medical expenses to document that withdrawals were for may have access to costs.
Do I need to file taxes to use my MSA?
You do not need to file taxes to use the account itself, but if you make your own deposits (beyond what Medicare deposits), you may want to file to claim the tax deduction. If you do not file taxes, you can still use the account; you straightforward will not receive the tax benefit of your deposits.
What if my plan's deductible changes mid-year?
If your plan's deductible changes, Medicare will adjust your account balance accordingly. Changes are rare during the year, but if they occur, your insurer will notify you and explain how the adjustment affects your account. Contact your plan directly if you are unsure how a change applies to you.