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Health Savings Account

A type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses.

Ways to contribute

While you can use the funds in an HSA at any time to pay for qualified medical expenses, you may contribute to an HSA only if you have a High Deductible Health Plan (HDHP) — generally a health plan (including a Marketplace plan) that only covers preventive services before the deductible.

Changing health plan

You can anytime change your health plan during open enrollment or a qualified life event, even when you own a HSA account. You just won't be able to contribute more to the HSA account anymore.

Contribution limit

For 2022, if you have an HDHP, you can contribute up to $3,650 for self-only coverage and up to $7,300 for family coverage into an HSA. HSA funds roll over year to year if you don't spend them.

Growth

An HSA may earn interest or other earnings, which are not taxable. There are companies that let's you invest your HSA contributions into money market to get higher returns as well.

Non-Qualified Withdrawls

If you use HSA funds for any reason other than to pay for a qualified medical expense, those funds will be taxed as ordinary income, and the IRS will impose a 20% penalty (for withdrawls before the age of 65).

Beneficiary

Naming your estate as the beneficiary of your HSA will help the account avoid probate. This means the courts will not have sole discretion of deciding who will inherit the account. The probate process can prolong the time it takes for your family to obtain the HSA funds.

Spouse

If your spouse is the only designated beneficiary, your HSA will be transferred to your spouse and they will own the account. Your spouse will receive all the benefits of account ownership and can make tax-free withdrawals to pay for qualified health care expenses.

Non-Spouse

You may also name your children or other non-spouse individuals as a beneficiary. For someone other than a spouse the tax benefits of account ownership do not transfer. The balance of the account will be distributed to your beneficiary and becomes taxable to them in the year you pass away.

Non-spouse HSA beneficiaries do not fare very well. The beneficiary does not have to use the funds in 10 years, but they will pay taxes on the amount accumulated in the HSA in the original account holder’s year of death.

It is much better if the original account holder withdraws this money during retirement, as a taxable income, and then pass it on the beneficiary. When making this decision, consider your own tax bracket as well as beneficiary's tax bracket.

Estate

You can name your estate as beneficiary. The assets will be transferred to your estate and treated as taxable income on your final tax return.

Making Claims

Note: Save all your medical tax receipts over the years, and claim them in retirement to take all that money out tax free. This way you let this money grow and not have to pay taxes. However you'll want to bear the medical expenses out of pocket until that retirement to do this.

Resources

Last update: May 2, 2024