Dear Liz: I just read your column on HSA accounts. I was with you right up until “deathbed drawdown.” I sincerely hope that I am not thinking about my HSA when I am nearing death. I’d just rather pay the tax.
Answer: That’s certainly your prerogative, but financial planners note that good record keeping can allow those with large HSA balances to avoid an otherwise unnecessary tax bill.
HSAs offer a rare triple tax break: contributions are tax-deductible, the money grows tax deferred and withdrawals are tax free when used for qualifying medical expenses. Furthermore, HSAs can be rolled over from year to year and invested for growth, which has led some people to accumulate substantial sums as a supplement to their retirement funds.
Fortunately, you don’t have to take a withdrawal in the same year you incur an unreimbursed medical expense. As long as the expense was incurred after you established the HSA and before your death, it can justify a tax-free withdrawal years or even decades later. Those who have kept good records of their unreimbursed medical expenses can justify last-minute withdrawals if necessary.
I agree it makes sense for a deathbed drawdown. But as I’ve told my wife, wait for MY death (assuming l go first) and then cash out our family HSA. The tax implications for our kids are too great to do otherwise.
So I did mine differently. I had enough medical receipts for my HSA funds. But I didn’t want to have to keep keeping up with them, or worse, have my wife have to do it if I went first. So last year, I used my HSA funds for our living expenses that I would otherwise have used IRA funds for. I also did a Roth conversion for the same amount. The income taxes for the Roth were the same as I would have paid anyway for living off the IRA funds. So now, the money is in my Roth, and I won’t have to continue the medical receipts recordkeeping.