The Health Savings Account has been a wonderful addition to the financial landscape of people who are eligible for one. They’re often thought of as a way to pay for qualified medical expenses with pre-tax money during your working years for things like deductibles, copays, and non-covered items—in other words, things not covered by insurance.
You can’t make contributions to an HSA once you sign up for Medicare, but you can still use the money in the account to pay qualified medical expenses just like you could before retirement. You can use the money to pay Medicare premiums, and expenses not covered by Medicare, such as dental, vision, and hearing costs. You can even use HSA dollars to pay long-term care costs and long-term care insurance premiums.
When you die, any money left in the HSA can be transferred to your spouse without going through probate. In the year you die, a contribution can be made based on your eligibility. The next year, your spouse can make an HSA contribution if they are eligible. In other words, your spouse gets all the same benefits you had.
But woe to a non-spouse beneficiary who inherits a Health Savings Account. The tax benefits of the HSA do not transfer.
When a non-spouse beneficiary inherits a Health Savings Account, the account is immediately changed to a taxable account in the beneficiary’s name and the entire amount becomes taxable in the year the original owner dies. The HSA amount can be reduced by any qualified medical expenses the original owner owed at the time of death if those expenses are paid by the beneficiary within one year of the date of death. After that, the beneficiary has to pay taxes on what’s left.
If the beneficiary is your estate, the HSA will be changed to a taxable account in the name of the estate. The amount in the account has to be claimed on IRS form 1041 when the final tax return is filed. The account will be included in probate.
If the beneficiary is a trust, the account will be changed to a taxable account in the name of the trust and the value of the account becomes taxable to the trust, although in this case, the account does not go through probate.
There is one way around the tax consequences of a non-spouse inheriting your Health Savings Account. Give it to charity. You can’t make direct gifts from your HSA to a charitable organization while you’re alive. But when you’re gone, the balance of your account can be given to charity, which isn’t strapped by the requirements that exist for all other non-spouse HSA beneficiaries.
Experts say when it comes to Health Savings Accounts, make your spouse the beneficiary, pay as many qualified health expenses as possible from your HSA, and if you want to leave tax-advantaged accounts to your heirs, let them inherit IRAs and retirement accounts, where the tax consequences are not quite so severe.
Disclaimer
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice, or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at [email protected].
