Health Savings Account for Tax & Estate Planning
By: Marie Feindt
A Health Savings Account (HSA) offers a triple tax advantage, making it a powerful financial and estate planning tool. Here’s how:
Tax-Deductible Contributions
Contributions to an HSA are tax-deductible (even if you don’t itemize deductions).
If made through payroll deductions, they are pre-tax, reducing your taxable income for federal and often state taxes.
Tax-Free Growth
Funds inside the HSA grow tax-free, meaning no tax on interest, dividends, or capital gains.
Unlike other tax-advantaged accounts (e.g., 401(k)s, IRAs), there are no required minimum distributions (RMDs) at age 73.
Tax-Free Withdrawals for Qualified Medical Expenses
Distributions are tax-free if used for qualified medical expenses (including Medicare premiums, long-term care costs, and healthcare in retirement).
After age 65, non-medical withdrawals are taxed like a traditional IRA (i.e., taxed as ordinary income but no penalty).
HSA as an Estate Planning Tool
Spousal Beneficiary: If the spouse is the designated beneficiary, the HSA remains an HSA, allowing them to continue tax-free medical withdrawals.
Non-Spouse Beneficiary: If a non-spouse inherits, the HSA is included in their taxable income (except for medical expenses paid in the year of death). Any earnings on the account after date of death is income to the beneficiary.
Estate Tax Planning: HSAs can be used to pay medical expenses in retirement, reducing other taxable estate assets.
Because of its tax advantages and estate planning flexibility, an HSA can act as a stealth retirement account for those who can afford to pay medical expenses out of pocket and let the HSA grow.
Maximizing a Health Savings Account (HSA) for estate planning involves strategic contributions, spending, and beneficiary designations. Here are the best strategies:
Maximize Contributions Every Year
Contribute the maximum annual limit ($4,300 for individuals and $8,550 for families in 2025, with a $1,000 catch-up for those 55+).
If married, both spouses can maximize their own HSAs if they each have a qualifying High Deductible Health Plan (HDHP).
Invest HSA Funds for Growth
Once the HSA reaches a minimum cash balance (set by the provider), invest in mutual funds, ETFs, or stocks to allow tax-free growth.
This turns the HSA into a "stealth IRA" for retirement healthcare costs.
Pay Medical Expenses Out-of-Pocket & Let HSA Grow
Avoid using HSA funds immediately—pay medical expenses with taxable income instead to allow tax-free compounding.
Reimburse yourself later: Keep receipts and withdraw tax-free years later when needed (there’s no time limit on reimbursement).
Use for Medicare & Long-Term Care Costs
After age 65, HSA funds can be used tax-free for Medicare premiums (except Medigap), long-term care insurance, and out-of-pocket medical expenses.
This reduces reliance on other taxable retirement accounts.
Optimize Spousal Inheritance
Name your spouse as the primary beneficiary to allow the HSA to remain tax-advantaged after your death.
A spouse inherits the HSA tax-free and can use it for their own medical expenses.
Consider Tax-Efficient Strategies for Non-Spouse Beneficiaries
A non-spouse beneficiary must cash out the HSA immediately, paying ordinary income tax on the full amount.
To reduce tax impact, plan to use HSA funds for medical expenses in retirement rather than leaving a large balance for heirs.
Use for End-of-Life Expenses
HSAs can cover tax-free funeral and medical expenses incurred before death, helping reduce the taxable estate.
Within a year of death, heirs can use HSA funds for the deceased’s unpaid medical bills tax-free.
Reduce Estate Tax Liability
HSAs reduce the size of your taxable estate if used for medical costs before death.
This strategy is useful for high-net-worth individuals looking to minimize estate tax exposure.
Utilize Employer Contributions & Rollovers
If your employer offers HSA contributions, take full advantage—it's essentially free money.
If changing jobs, ensure your HSA rolls over to an account with better investment options.
Withdraw Strategically After Age 65
After 65, non-medical withdrawals avoid the 20% penalty but are taxed as ordinary income.
If in a low tax bracket in retirement, consider strategic withdrawals.