Health Savings Accounts (HSAs) have steadily grown in popularity since their introduction 20 years ago. It's easy to understand why. The account is paired with a high-deductible insurance plan. The premise is that small costs are paid from the HSA, and insurance will kick in once the deductible (at least $3,200 this year) is met. Contributions to an HSA are tax deductible. Earnings aren't taxed, and withdrawals -- assuming they're used for medical expenses -- are tax-free. Savings can be invested in the stock market, offering great growth potential. Families can contribute up to $8,300 this year with 2025's maximum rising to $8,550.
The problem with these accounts may come as a surprise: People are saving too much in them. Someone who started saving the family maximum just 10 years ago, investing their savings in the S&P 500, would have around $145,000 in their HSA today. Imagine this is someone who started saving in their 30s or 40s; the HSA could easily grow to $1 million by the time they're ready to retire. We all know that medical expenses are abundant in old age, but are they seven-figures abundant?
This is a problem because except for spouse-to-spouse transfers, inheriting an HSA leads to a large tax bill for the beneficiary. It is a great way to save, but an HSA shouldn't be used to pass wealth to the next generation. For those who save prolifically using an HSA, we strongly advise a spending plan to accompany the savings plan. In addition to the usual medical expenses (copays, dental and vision care, etc.), here are a few oft-overlooked ways to spend an HSA:
Annual Medicare premiums deducted from social security can be reimbursed from a HSA.
Funds in an HSA can pay for in-home nursing services, including bathing and grooming for those who require assistance.
Entrance fees (or "Founders Fees") paid to a retirement community are often partially classified as medical expenses. The medical expense component can be paid or reimbursed from a HSA.
Strictly speaking, one can take money from an HSA for any purpose, but withdrawals are taxed and penalized an additional 20% if there isn't a medical expense to match. Those over age 65 are still taxed, but are not subject to a penalty. In this way, an HSA is similar to a traditional IRA for those over age 65.
Consider naming a charitable organization as the beneficiary of an HSA. Leave your loved ones assets that receive more favorable, or at least, more flexible tax treatment.
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