Are there rollover options for HSA distributions?
My understanding is that an HSA will grows tax free as long as I live. Its the dying part that has me asking this question.
I am single and would like to avoid having to make tax free eligible HSA withdrawals one day short of my passing so that my beneficiaries can avoid paying taxes on this inherited account.
Since my expiration date is unknown how can these HSA distributions be made (at the latest possible date) without the tax free status dying with me?
Is there a way to rollover tax free HSA dollars into a tax free Roth account that can be inherited? Or is there some other creative method of retaining its tax free status?
Thanks in advance.
Permalink Submitted by Alan - IRA critic on Mon, 2016-12-12 02:55
Rollovers to other accounts are not allowed. What you should do depends on your estate plans. You could leave the HSA to your estate and the value would be taxed on your final return, but the estate would then have the full value to pay any final expenses or debts. Or your goal may be to spend the HSA down as much as possible while you are alive, and whether you have to work at that or not depends on how large the HSA becomes once you retire. You may know that from the date your open your HSA, you can reimburse yourself for qualified medical costs that you paid out of pocket even if that goes back decades. It takes some record keeping, but will save you tax dollars in the meantime. Also be sure you are aware of the types of expenses including certain Medicare premiums that are eligible expenses. And if you do wish to leave the HSA to a non spouse beneficiary, while they must cash it out and pay taxes, they still net out the difference. It would be exactly like leaving them a traditional IRA that had to be cashed out instead of stretched. But there is no way the beneficiary can stretch the account.
Permalink Submitted by William Tuttle on Mon, 2016-12-12 03:31
You should consider that the advantage of deferring your HSA reimbursments is based on the amount of that deferral. In my case by 65, these deferrals will be the minority of my HSA balalnce. So reconciling them will have minimal effect on the long term growth of the HSA. So my plan is to start at 65 reconciling 1/5 of the balance at 65, 1/4 of the balance at 66, and so on. Then reimburseing qualified nedical expenses immeidately > 70. My view is tax free distributions in the hand are better than risk turning them into lump sum tax liability for your beneficiary(s). Sometimes risk is uncompensated unnecessary risk.
Permalink Submitted by Steve Hagedorn on Mon, 2016-12-12 15:13
Thanks for the responses so far. I can see the importance of leaving instructions to beneficiaries with regard to the ‘”last year” rule:“The full amount is taxable to the beneficiary in the year of death, but the beneficiary can deduct qualified expenses paid by the beneficiary within one year of date of death.” So if i understand your strategy correctly (spiritrider):Let’s say I have accumlated eligible healthcare costs of $10K by age 65 that were paid out of pocket in prior years..
Just wondering if i understood your strategy correctly?
Permalink Submitted by William Tuttle on Mon, 2016-12-12 22:24
Yes, that is pretty much it. Think of it as a highly accelerated RMD for non-spouse HSAs (that don’t require RMDs). You could come up with a longer period (10 years?), another starting point, or plan. I just think at some point, the risk of losing the tax-free distribution becomes too high. The other consideration is that you should always take HSA reimbursements before Roth withdrawals after 59.5. Essentially, spend tax-free money with strings, before tax-free money with no strings.
Permalink Submitted by Alan - IRA critic on Mon, 2016-12-12 23:50
You would obviously step up the application of eligible reimbursements if your health deteriorates. While purely personal speculation, I would not be surprised at some point to have this reimbursement feature curtailed due to it’s potential for abuse and IRS’ desire to avoid reviewing decades of taxpayer accounting for reimbursements. In doing so, they would probably place a 2 or 3 year deadline for reimbursement of all unreimbursed claims paid by personal funds that were not itemized or used to meet the 7.5% or 10% floor for itemizing and which were incurred at some determined date such as more than 4 years prior to the end of the current tax year. That would result in a time limit for accumulating unreimbursed expenses.