What Happens to Money in Your Health Savings Account When You Die

The tax rules differ depending on whether you name an HSA beneficiary and what that person’s relationship is to you.

I read your column about rolling over money from an IRA to a health savings account and was wondering what happens to the money if I die before using it?

If you don’t designate a beneficiary for the account, the money will be included in your estate and the value will be taxable on your final income tax return. That’s why it’s important to designate a beneficiary for your HSA. If your spouse is your designated beneficiary, the account will be treated as your spouse’s HSA after you die. “It remains in an HSA, and your spouse enjoys all the benefits and accepts all the responsibility of managing the HSA,” says Todd Berkley, president of HSA Consulting Services, which runs www.AskMrHSA.com. Your spouse can use the money tax-free for his or her own medical expenses and isn’t required to have an HSA-eligible health insurance policy, Berkley says.

If someone other than your spouse is the designated beneficiary, however, the HSA will be closed and the money will be taxable to the beneficiary in the year you die. One exception: Your survivors have up to one year after you die to use the money tax-free for any eligible medical expenses you incurred after you opened the account, as long as you kept the receipts and the expenses hadn’t already been reimbursed by the HSA, says Berkley.

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Ask your HSA administrator for a beneficiary designation form if you haven’t already specified a beneficiary (or you may be able to designate your beneficiary online). For more information about HSAs, see FAQs About Health Savings Accounts.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.