We are wrapping up our discussion about health savings accounts. When we left off in our last post, we were talking about some of the advantages of HSAs and the differences between HSAs and other tax-advantaged programs.
One of the key differences between a flexible spending account and an HSA is that balance will roll over from year to year. The flex account allows you to set aside money to cover medical expenses that may not be covered by your health insurance. Flex account contributions are pulled from your paycheck before taxes are taken out, lowering your taxable income. Unlike HSAs, there is no deductible threshold for a flex account, but any money left in the flex account at the end of the year is forfeited.
Because the money stays in the account and accumulates over time, an HSA is also a good retirement planning tool. There is no time limit on it -- money you contribute today can be used for a health emergency at any point in the future.
If you pass away before you have used all of the funds, the money will be distributed to your designated beneficiary. There is a catch, though.
The federal government prefers that you keep your tax breaks in the family. If you name your spouse as your beneficiary, the HSA will simply transfer to his or her name. Nothing else will change. If, however, you name someone else as your beneficiary, the funds alone transfer after all of your qualifying medical expenses are paid for, and the beneficiary will be taxed on the account's fair market value. If you name your estate or name no beneficiary, the funds become taxable income on your final tax return.
As you can see, then, there are distinct advantages to checking all of your accounts to make sure the beneficiary information is up-to-date. And, the more current your accounts -- and your estate planning documents -- are, the lower the risk of misunderstanding and discord among your heirs.