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How to Get the Most Out of Your Health Savings Accounts

If you have a high deductible health plan you can qualify for a Health Savings Account (HSA).  Your employer can fund it with pre-tax dollars, or if you contribute to one on your own, your contributions are tax deductible. Moreover, those contributions grow tax-deferred within the HSA and can later be withdrawn tax-free to pay for unreimbursed qualified medical expenses.  Unlike IRAs and other tax advantaged retirement accounts, an HSA has no income limit for making contributions, so even individuals within the highest tax bracket can contribute to an HSA and receive a tax break—making it a great savings tool to utilize over one’s lifetime.     

Because the program has been around for almost two decades, and with the prolonged run up in the stock market, some individuals have seen their HSA accounts grow significantly. For example, a widowed retiree who inherited an HSA from his spouse and combined it with his own account, now has an HSA worth over $80k. While much of those funds will likely be used for medical expenses and health related insurance coverages throughout his retirement, the entire balance of the account may not be exhausted during his lifetime. In cases like this, it is recommended that the client evaluate the account, along with the rest of the estate, in order to determine the assets that will transfer most efficiently to beneficiaries after the client has passed.

In the event an HSA account owner passes away and the heir is a non-spouse, the health savings account is distributed and becomes taxable income to the heir in the year of the account owner’s death. This contrasts starkly with an inherited IRA. As of 2020, a non-spouse who inherits an IRA has ten years from the year after the owner’s death to exhaust the balance of the inherited IRA, allowing the heir to control the distribution phase of the account. The beneficiary of an inherited HSA has no such control over the timing or amount of the distribution—it is immediate.

Therefore, in our example, there would be a balancing act of taking distributions from an HSA tax free for medical purposes or completely exhausting it prior to passing away in order to prevent the transfer of tax implications to the non-spouse heir. (Beginning at age 65, an HSA owner can take distributions from their account for non-medical purposes, but the distribution is considered income similar to any qualified IRA distribution.)

HSAs are a great tax saving vehicle and remain useful for families all the way through to their retirement years. Considering a large part of many retirees’ expenses can be medical in nature, transferring an HSA to a child may not be their biggest concern. However, it does play into the overall retirement and estate planning services each of our clients receive in order to maximize their accounts in the most tax efficient manner for them and their loved ones.

Bob Lagonegro, CFP®


This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. Community First Bank, HFG Trust, and HFG Advisors have no duty or obligation to update the information contained herein. Further, Community First Bank, HFG Trust, and HFG Advisors make no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is potential profit there is possibility of loss. This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services, banking services, or an offer to sell or solicit and securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Community First Bank, HFG Trust, and HFG Advisors believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, included the information contained herein, may not be copied, reproduced, republished, or posted in any form without the prior written consent of Community First Bank and/or HFG Trust and/or HFG Advisors. HFG Advisors, Inc, is a wholly owned subsidiary of HFG Trust, LLC. HFG Trust, LLC is a Washington state-registered Trust company and wholly owned subsidiary of Community First Bank.