The Pros and Cons of an HSA with regards to Retirement and Estate Planning

Franchesco Fickey Martinez • October 9, 2024

An HSA or Health Savings Account is a widely discussed retirement vehicle that is mentioned online, on social media, and even on YouTube.


From a tax perspective, the HSA is a phenomenal tax advantage account. Here is a list of the common tax benefits one might see:

  • Tax-deductible contributions: What you contribute today to your HSA would be deducted from your taxable income, regardless of whether you have medical expenses in the given year or have itemized deductions.
  • Tax-free earnings: Interest and earnings (e.g. dividends, capital returns on investments, and over stock growth) on the assets in your HSA account are tax-free
  • Tax-free withdrawals: Withdrawals from your HSA are tax-free, if you use them to pay for qualified medical expenses (QME)


Some financially savvy investors or retirement planners may also consider the ancillary account benefits, such as:

  • Employer contributions: An Employer MAY contribute a portion or percentage to your HSA Account, and those contributions are excluded from the Employee's gross income. AKA: free tax-free money from an employer.
  • Portability: HSAs are portable, meaning that they stay with you (the employee) if you change jobs or leave the workforce altogether. 
  • Rollover funds: Unspent funds in your HSA Account roll over from year to year. 


In summary, the HSA or Health Savings Account is a Triple tax advantage account. Emphasis on the Triple because:

  1. money is tax-free when it goes into the account,
  2. money is tax-free when it grows, and
  3. money is tax-free when it comes out.


What is the Catch/the Limitations?

Apart from the small "Contribution Limit" (2024: $4150 for single, $8300 for married, and an extra $1000 extra if over the age of 55), a special type of high-deductible health insurance is required and qualified medical expenses (QME) are required to withdraw the funds tax free.


Now, to be frank, medical expenses are generally substantial the older someone gets. Medical bills have the ability to break retirement plans, prompt bankruptcy, and even force older individuals back into the workforce. Health Insurance and health insurance deductibles may not cover all of the needed medical expenses, and have the potential of putting a strain on most finances.


What are some Qualifying Medical Expenses?

Examples of eligible medical expenses (Source: “The Complete HSA Eligibility List,” HSA Store)

  • Ambulance services
  • Bandages
  • Blood-sugar tests
  • Crutches
  • Gynecologist services
  • Hearing aids and batteries
  • Hospital care
  • Insulin
  • Laboratory fees
  • Medicines prescribed by a doctor
  • Surgery
  • Vaccinations
  • X-rays
  • Routine dental needs, such as:
  • Dental Cleanings
  • Dental Exams
  • Dental X-rays
  • Dental surgeries
  • Dental veneers
  • Orthodontics/Braces
  • Crowns and bridges (for medical, not cosmetic, purposes)
  • Dental plan copays
  • Dental reconstruction
  • Dental sealants 
  • Eye needs, such as:
  • Laser/LASIK eye surgery
  • Eye exams
  • Radial keratotomy
  • Prescription contact lenses and contact solution
  • Eye drops (OTC)
  • Optometrist services
  • Prescription eyeglasses sunglasses
  • Vision plan coinsurance
  • Vision plan deductible 


How Much can an HSA Grow? Could it reach a quarter of a million or half a million?

Yes, if you max out the contributions every year, don't use the account during the working life, invest in safe Stocks/ETFs, and diversify the investment, a 10% annual rate of return is possible year after year. The $1 added today might grow to $2 in 7 years, $4 in 14 years, and $8 in 21 years.


For example, if a Family contributed $8000 for 1 year in 2024, and did nothing else for 21 years. If the HSA had a rate of return of 10%. The $8k could grow to $16k in 7 years (2031), $32k in 14 years (2038), and $64k in 21 years (2045).


Another example, if the Family contributes $8k for 5 years straight, never spending the saved money, an HSA account could easily grow to $250k in 2-3 decades.


It has mostly been Positive up to this Point, what are the Cons?

This topic could also be worded as:

  • What happens to an HSA After Death?
  • Inheriting an HSA from a Spouse?
  • Inheriting an HSA from a Parent?


In short, the negative concern revolves around Taxes. Taxes, when it comes to Retirement Planning (specifically the Estate Planning for when you pass away). The IRS would NOT create a Wonderful Triple Tax Advantaged Account that would LAST FOREVER.


Taxes will eventually be due!!!


The Tax Concern arises in two ways:


First, who the beneficiary might be affects taxes. Spousal Beneficiaries may inherit an HSA . . . FROM A DECEASED SPOUSE . . . and continue to receive the same tax benefits.


Children or anyone besides the spouse of the deceased would inherit the HSA with INCOME TAX DUE in the year the HSA is received. To repeat, children would be burdened with the taxes owed on the HSA if a parent wills the HSA to them. The child's Tax bracket may jump up to a higher tax bracket for the year of inheritance. A $100k Inherited HSA may pose a $30k Tax bill, which is a reality that is often overlooked.


Second, when the HSA is too large (how much is too much?). $100K might be a safe savings amount. $300k is substantial, but also safe. Half a million and even 1 million might be too much.


The most painful sight for a family might be inheriting  $1,000,000 HSA from a Parent, to then see half of it being owed to the IRS.


How do you get started?


First, Contact an estate attorney to review your assets, liabilities, and overall retirement plan. The estate attorney can explain the process, assist with creating the trust or will, and explain asset transferring and your ultimate goals. An estate attorney can also have useful ideas, like starting an HSA.


Second, start an HSA at your preferred Brokerage, like Fidelity, Schwab, etc. (Your local bank may also offer an HSA, but do compare the interest rates/rates of return, the risk in investing in the stock market may outweigh what a bank is offering). An HSA takes about 10 minutes to set up.







Disclaimer: This Blog is made available by the lawyer or law firm publisher for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand that there is no attorney-client relationship between you and the Blog/Web Site publisher. The Blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.

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