Saving/Investing for Retirement

Monica Jalife, CFA, CFP®, MBA is a Wealth Advisor and Principal at Withum Wealth Management.

Monica was featured in TheStreet on August 12, 2019 discussing Health Savings Accounts and Estate Planning.

Question: If the beneficiary of a health savings account (HSA) is a spouse, what happens at the death of the account owner? Would the account value be tax-free should the spouse choose to surrender the HSA? Could the spouse beneficiary continue the HSA and name children as beneficiaries? Could the account owner name children as beneficiaries and if so, would they be able to continue the contract at the death of the account owner? If not, would they receive the account value tax-free?

Answer: If the account owner names his/her spouse as beneficiary of their HSA, the account becomes the spouse’s and the spouse can use it for qualified medical expenses tax-free, including those of his/her dependents, says Monica Jalife, a portfolio manager and principal with Withum Wealth Management. “The surviving spouse would not need to have HSA-eligible health insurance to continue to hold the account,” says Jalife. “However, if s/he did have and is eligible, s/he could make contributions to the HSA. In addition, s/he can name new beneficiaries.” For non-qualified expenses, Jalife says the same rules for withdrawals would apply (taxes plus a 20% penalty before age 65, or taxes incurred on the withdrawal but no penalty after 65 years old). And, if the account owner names a non-spouse beneficiary, the HSA loses its tax-free status and the fair market value of the account as of the date-of-death will become taxable to the beneficiary, says Jalife. “If any portion of that account is used to pay medical expenses of the account owner within one year of his/ her death those will not be taxable to the beneficiary,” she says.

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