HSAs Can Trigger 1-Year Tax Hit for Non-Spouse Heirs as 39.3 Million Accounts Expand
Updated
Updated · USA TODAY · May 20
HSAs Can Trigger 1-Year Tax Hit for Non-Spouse Heirs as 39.3 Million Accounts Expand
2 articles · Updated · USA TODAY · May 20
Non-spouse heirs who inherit an HSA must generally count the entire account value as taxable income in the year the owner dies, while a surviving spouse can keep the account and its tax advantages.
That rule turns leftover HSA balances into a potential estate-planning problem because there is no step-up in basis and no multiyear withdrawal window like inherited retirement accounts.
Advisers say owners with large balances should spend HSAs on eligible costs, use old unreimbursed medical receipts to pull money out tax-free, or withdraw after age 65 and pay tax themselves if their rate is lower.
Beneficiary choices also matter: leaving an HSA to a high earner in a high-tax state can worsen the hit, while naming a charity or donor-advised fund can pass the money tax-free.
The warning comes as HSAs grow more common—39.3 million accounts covered 59.3 million Americans at the end of 2024—and recent tax changes widened eligibility to more health plans.
Your HSA could become a tax nightmare for your heirs. What is the smartest way to spend it down now?
Why are inherited HSAs a 'tax bomb' while inherited 401(k)s get preferential tax treatment?