Health Savings Accounts (HSAs) are one of the best savings vehicles allowed in the U.S. You get a tax deduction when you contribute money. The money grows tax free. When used for a qualified medical expense, that money comes out tax free. What’s not to like? Well, if you want to get picky, I don’t like the rules for passing this money to a non-spouse.
HSAs are relatively new. Most people haven’t seen them passed to a spouse, let alone a non-spouse. Your spouse can inherit your HSA and maintain the same tax treatment. As long as the money is used for medical expenses, it comes out tax-free.
Do you know what happens when an HSA is left to a non-spouse? All the money is taxed to the beneficiary in the year of the original owner’s death. There are ways to get around this. If you are “super funding” your HSA and investing it for growth, keep track of your expenses. Your beneficiary can submit those medical expenses up to one year after your death.
To be honest, submitting years’ worth of medical expenses to withdraw the funds tax free is asking a lot of a beneficiary. There’s enough paperwork and strategy around settling estates without adding this responsibility.
Perhaps a better approach would be to collect your HSA reimbursements in your 80s and consider it a win. Don’t go for the absolute maximum tax-free growth and risk missing out on the tax-free withdrawals.
About the Author: John O’Connor
John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.
Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.