Everybody is talking about which the best savings accounts are, since they can be great for stacking up some nice sums. However, if they’re not managed properly, they can actually backfire. And we’re not the only ones saying this, since, according to Forbes, a dentist went through something similar!
After turning 65 last years and managing to save over $220,000 in a health savings account, able to generate $13,000 per year in dividend income, he had one clear plan: “leave it all alone and let his daughter deal with it,” after he passes. If you’re in a similar situation and have just the same plan, you should know that this is actually a big mistake.
Be careful who you leave your lifetime savings to!
A health savings account, left to a non-spouse heir, becomes taxable to the heir in the year of the owner’s death. Basically, in the dentist’s case, almost half of it could be lost, due to taxes.
Instead, it would be highly recommended for him to spend down the health account for healthcare expenses in retirement – paying out of the pocket – so the money will come out without any taxes.
The main reasons to start a health savings account is because you are eligible for tax break, for simply putting money in it. If you have an account like this thanks to your employers, you can fund it with pre-tax money. On the other side, if you save for one all by yourself, your contributions can be tax-deductible.
Just start saving and if it’s enough to cover healthcare expenses and if you need anything from it, you can pull out tax-free money.
So, which will it be, HSA or IRA?
Finally, there’s one question left: is a healthcare savings account better than a traditional Individual Retirement Account? If a member of the family (other than your spouse) is left the IRA, it could be used for required payouts, extending tax-deferred growth, but also softening the income tax blow.
Additionally, you should know that your HSA balance will be introduced in the assets that your estate consists in, as long as you’re in estate tax territory.