Kitces on large HSA account late in life

[RunningBum]

New article (last month) at Kitces' blog, authored by Ben Henry-Moreland on dealing with a large HSA balance.
https://www.kitces.com/blog/hsa-tax-benefits-withdrawal-qualified-medical-expenses-irs-records

The article covers the usual choices with HSAs, whether to use the account to pay for current medical expenses, or to pay those expenses out of pocket, and let them grow tax free. It focuses on the latter choice, and how you need to save medical expenses paid out of pocket so you can reimburse yourself later with the HSA. I know many here are doing this, myself included.

Part of the discussion is what to do if you have a sudden illness and have not yet reimbursed yourself. If your beneficiary is your spouse, the account passes to them and they can use it as their own HSA. If your spouse has passed or is not your beneficiary, you should reimburse yourself immediately, because once you pass, your heirs cannot withdraw money tax free using your medical receipts. I have heard contrary opinions on this here, but the article is clear in saying you need to reimburse yourself using those saved receipts before you die. The article goes on to say:

Special Rule For Expenses Paid By HSA Beneficiary After Original Owner’s Death

There is one other way that a non-spouse beneficiary can avoid being taxed on the full value of an inherited HSA. IRC Section 223(f)(8)(B)(ii) allows for non-spousal beneficiaries of HSAs to reduce the taxable value of the HSA by the amount of any qualified medical expenses that were:

1. Incurred before the date of the decedent’s death; and
2. Paid by the beneficiary within 1 year after the decedent’s death.

In other words, expenses like hospice care or emergency room bills which were unpaid as of the HSA owner’s death may be used to reduce the amount of the HSA that becomes taxable income to the beneficiary, but only if the beneficiary pays such expenses within 1 year.

If one was to die suddenly, your HSA would pass to your heirs with poor tax treatment for any non-spouse heir. They have to take the entire balance as regular income, with tax due that year, with the exception of your final medical bills (if any) before you pass.

An HSA is a great savings vehicle, with triple tax advantages (tax deferred contribution, tax free grown, and tax free distribution for eligible medical expenses), but be careful about hoarding it to the end. Certainly you would want to withdraw from it (to the extent of saved medical expenses) before pulling from a Roth, since the Roth is transferred to heir tax-free.

 

[jebmke]

I decided a few years ago to run ours down mainly for convenience.

 

[SecondCor521]

Yep, I've mentioned the relatively poor tax treatment of HSAs at death several times in the past. This is precisely why I have a plan to stop contributing to my HSA around age 58 and start draining it at about age 65.

By doing so, I expect to drain my HSA by age 84, which is my current 50/50 longevity according to the SSA. This is my chosen balance between the oft-touted triple tax advantages and the poor treatment at death. (And the minor added hassle of maintaining an HSA in the first place.)

 

[RunningBum]

I've got receipts for about half my balance and I wouldn't hesitate to use them if I needed more cash and didn't want to take any more income.

 

[COcheesehead]

I look at it as my tax free rollover money without having to do a rollover. LOL.

 

[audreyh1]

I decided a few years ago to run ours down mainly for convenience.

Yes, same here. We didn’t have HSA compliant insurance until ACA became available and so we haven’t amassed as much as some others who have made it into 6 figure territory. But it turned out to be about the right amount to cover Medicare premiums until reaching 70 and that is very easy to document. DH pays directly from his HSA. I haven’t reached Medicare age yet.

Draining the accounts earlier will mean fewer accounts, fewer tax forms to file. Get rid of a huge bookkeeping bundle. It’s a nice break but we will be glad to be done with it.

 

[Sunset]

We never got any HSA's. So missed out on that great tax shelter.

 

[The Cosmic Avenger]

Yep, I've mentioned the relatively poor tax treatment of HSAs at death several times in the past. This is precisely why I have a plan to stop contributing to my HSA around age 58 and start draining it at about age 65.

By doing so, I expect to drain my HSA by age 84, which is my current 50/50 longevity according to the SSA. This is my chosen balance between the oft-touted triple tax advantages and the poor treatment at death. (And the minor added hassle of maintaining an HSA in the first place.)

That also allows you to have more spending money but report a lower taxable income. It's tempting to try to save it for a catastrophic medical expense, but I think I'll try to drain it gradually, too, mainly for the tax advantage.

 

[athena53]

I itemize and between Medicare premiums (with IRMAA surcharges) and the occasional expensive dental issue, I have enough medical expenses to go over the current threshold, so my HSA has just been sitting there and getting bigger.

One thing I read that I may do is leave the HSA to a charity. Right now I make a provision in my will for an amount to go to my church that's roughly the size of my HSA. That would leave more of the non-taxable (well under the current inheritance tax thresholds) part of my estate to DS and DDIL. I just haven't gotten around to changing my will yet- was updated 3 years ago and not much has changed.

 

[audreyh1]

I itemize and between Medicare premiums (with IRMAA surcharges) and the occasional expensive dental issue, I have enough medical expenses to go over the current threshold, so my HSA has just been sitting there and getting bigger.

One thing I read that I may do is leave the HSA to a charity. Right now I make a provision in my will for an amount to go to my church that's roughly the size of my HSA. That would leave more of the non-taxable (well under the current inheritance tax thresholds) part of my estate to DS and DDIL. I just haven't gotten around to changing my will yet- was updated 3 years ago and not much has changed.

You can do this via account beneficiaries, no? Investment accounts bypass the will if the beneficiaries are done correctly.

 

[athena53]

You can do this via account beneficiaries, no? Investment accounts bypass the will if the beneficiaries are done correctly.

Yes- but I want to do both steps at the same time. My intent would be to give the $XX,000 in my HSA to my church by naming them as beneficiary but then remove the specific bequest to my church (also about $XX,000) from my will. If I just change the beneficiary now the church will get the $XX,000 in my will AND the $XX,000 in my HSA. Not that that would put a big dent in what DS and DDIL would inherit. I'm also considering naming THEIR church the beneficiary of my HSA and not changing my will- they'd support that, I'm sure.

 

[pb4uski]

A few years ago I became concerned about what Kitces said as well as whether DW and DD would remember to make the withdrawal for past eligible expenses so I made a big withdrawal for eligible medical expenses from when we started our HSAs in 2010 to 2019.

Now, I do a withdrawal annually in the first quarter for the prior year's eligible medical expenses and should drain it in less than 10 years.