A Health Savings Account (HSA) offers a triple tax advantage, making it a powerful financial and estate planning tool. Here’s how:

1. 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.
2. 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.
3. 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:

1. 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).

2. 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.

3. 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).

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

For Informational Purposes only and not for legal or tax advice.

About the Author – Marie Feindt, JD 

Marie Feindt is the Planning Specialist – Estate Attorney at Members’ Wealth, a boutique wealth management firm that offers a comprehensive and holistic approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of estate planning experience, Marie and the Members’ Wealth team thrive on bringing clarity and confidence to clients’ unique situations. She believes everyone, young adults and older, need the essential documents to conserve and preserve and transfer assets accumulated during lifetime to the next generation.

Marie received her JD from Widener University School of Law, her bachelor’s degree from Penn State University, University Park and is currently enrolled in the Villanova University Charles Widger School of Law Graduate Tax Program.

Marie is an Adjunct Faculty at the Villanova University College of Professional Studies Paralegal Professional Certificate Program where she teaches Estates & Trusts and Civil Procedure & Litigation and Torts & Personal Injury Law.

Marie volunteers for a monthly legal clinic at The Salvation Army in Chester, PA facilitated by the Christian Legal Clinic of Philadelphia. She has served on the Women’s Commission of Delaware County and as a Board Member for the Delaware County Literacy Council.

Marie enjoys biking, reading, yoga and walking in her free time with her husband and three children.

To get in touch with the Members’ Wealth team today, I invite you to email info@memberswealthllc.com or call (267) 367-5453. 

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