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HSAs, Retirement & Their Tax Advantages

Frances Smith

CFP®, Wealth Advisor


Health savings accounts (HSAs) offer triple-tax advantage, making them popular savings vehicles to fund medical expenses. But if you’re thinking about leaving behind balances in an HSA, be mindful of your beneficiary choices. If you designate someone other than a spouse, your beneficiaries may be in for a surprise.

It shouldn’t come as a surprise that  and rising health care costs are one of the top concerns for most people. Today, 89% of employees say having health insurance contributes to financial security, and 73% mentioned health insurance as a top-three reason when contemplating a job change.1


HSAs Offer Triple-Tax Advantage

When reviewing the health insurance options offered by your employer, it’s important to weigh the advantages of a high deductible health plan (HDHP) and the corresponding HSA. The HSA has been around for 20 years and their usage has grown steadily in part due to the triple-tax advantage:

  • Contributions to an HSA are not taxed
  • Your account can grow tax-free
  • Distributions used for qualified medical expenses are not taxed


Fund and Use Your HSA Like an IRA

While most people may think of HSAs as short-term savings tools to self-fund current medical expenses, you can also use them as a long-term savings and investing tool. Funds in your HSA roll over each year, and even if you leave your job, you can keep your HSA. Similar to a 401(k) or an  account (IRA), you can keep your HSA with your old plan provider or roll it over to a new one.

You can think of HSAs like IRAs in that you can invest your HSA balance to grow your account for future needs. For instance, once you retire, you can continue to use your HSA balance for medical expenses, including Medicare deductibles, prescription drugs, and other medical costs.


What Happens to an HSA at Death?

So, let’s say you have managed to save up a significant amount in your HSA. For example, if you are over age 55 and contributed the maximum for a family since 2004, your HSA balance would total over $113,000. Additionally, if that balance was invested and earned 7% annually, that balance would be just over $204,000. But what happens to the remaining HSA balance after you pass away? The beneficiaries on your account will determine what happens to your HSA, and whether it’s a favorable inheritance vehicle.

  • Spouse: When a spouse is listed as the beneficiary the HSA retains its account status (now in your spouse’s name), and all the same HSA rules continue to apply.
  • Non-spouse beneficiary or your estate: If you leave behind an HSA to a non-spouse or your estate, your HSA is no longer an HSA. The fair market balance of your account becomes taxable income the year it is transferred, and your beneficiary/estate would owe taxes based on their applicable income tax rates. For example, if you pass on a $200,000 HSA to your child, your child’s income in the year of receipt would increase by this full amount. And if your child is in a high-income tax bracket, this could mean a 37% tax on the HSA, bringing the inherited amount down to $126,000. The same goes for your estate: this conversion of the HSA account to taxable income deprives your estate of monies that could have been spent tax-free.


Optimizing Your HSA for Your Beneficiaries

Ideally, if you have an HSA, once you retire you should try to spend down your account balance as much as possible. Again, you can continue using your HSA account during retirement even if you have Medicare (though you can’t contribute to your HSA once you’re enrolled in Medicare). Also, if you need long-term care or have a chronic illness, you can use your HSA to pay for these medical expenses.

If you expect to have a balance remaining in your HSA at your death, then there are a few ways to help optimize your HSA account for non-spouse beneficiaries.

  • First, within one year of the death, the beneficiary can use any portion of the remaining HSA balance to pay for outstanding medical expenses for the HSA account holder, effectively lowering the balance the beneficiary inherits. You would need to keep records and receipts for received care in this scenario. This makes the most sense when the beneficiary is also the beneficiary to the remainder of the deceased’s estate.
  • Or, if you are charitably inclined, a second option is to name your favorite charity as the beneficiary of your HSA and leave other assets to your loved ones. The charity will receive the balance of the HSA tax-free.

Health savings accounts provide a great tax benefit, and we encourage taking advantage of HSAs as part of your long-term savings strategy. Invest your account balance and allow it to grow until retirement without taking distributions, if possible. Talk to your advisor about how an HSA might fit into your wealth management plan.

1 “The State of Employee Benefits: Findings From the 2018 Health and Workplace Benefits Survey,” Employee Benefits Research Institute and Greenwald & Associates, 1/10/19.

Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. The above hypothetical examples are for illustration purposes only. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.