Make the most of your Health Savings Account

Do you have a health savings account (HSA) at work?

You may have enjoyed the comfort of an HSA account during your work life, knowing the money for your health needs would be there. Did you know that once you turn 65 and begin receiving Medicare, you can no longer make contributions to your health savings account? But you can still take withdrawals tax-free, to pay for many of your medical expenses. Among other things, you can:

• Use your HSA money to reimburse yourself for the money that Social Security withholds from your benefits for Medicare Part B (which in 2015 is $104.90 per month).

• Take tax-free withdrawals from your health savings account for Medicare Part D (but not supplemental medigap premiums).

• Use tax-free withdrawals to cover part of your long-term care premiums ($3,800 per year if you are age 61 to 70, and $4,750 if older than 70 in 2015).

What about non-medical expenses? If you use HSA money to pay non-medical expenses before you turn 65, you’ll pay a 20 percent penalty plus taxes on the amount withdrawn. Once you turn 65, the penalty goes away, but the withdrawn amounts are still taxable.

According to Kiplinger, the personal finance advisers, if you are still working at age 65 and your employer is contributing money to your HSA, you may be better off delaying Medicare Parts A and B. But conditions apply, so be sure to talk it over with your benefits adviser at work before deciding what to do.

Money left in HSA

What if you pass away leaving money in your HSA? Is it forfeited?

When you established your HSA you should have named a beneficiary. Of course, if your beneficiary is your spouse, your account becomes his or her account, and is not taxable as long as withdrawals are for qualified medical expenses (the same rules that applied to your use of the account). If your spouse makes withdrawals that are non-qualified, the funds withdrawn will be taxable.

But suppose your beneficiary is someone else, let’s say your daughter. At that point, an HSA loses its identity as a health savings account, and becomes gross income to your daughter. For example, if you pass away leaving $1,000 in your HSA, your daughter will need to include that money in her gross income. Taking the example a step farther, if your daughter receives $1,000 from your HSA and then learns that you had qualified medical expenses of $400 left unpaid, she can use the funds she received from your HSA to pay that bill, and will only have to claim the remaining $600 in her income.

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