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::December Edition::

Welcome to the December edition of Financial Friday, Oklahoma Money Matters' online personal finance question-and-answer forum. This month, we're answering a question about utilizing health savings accounts.

Let's say I used the HSA very little due to good health. Could I ever use it as a savings account? And what age would that be? Also, in case of death, would my son inherit the funds?

A Flexible Spending Account (FSA) and a Health Savings Account (HSA) are both tools designed to help you save for medical expenses, but they have key differences. An FSA is typically employer-owned, and the funds are generally "use it or lose it," meaning that money not spent by the end of the year (or a grace period) is forfeited. FSAs also don't roll over when you change jobs or retire.
In contrast, an HSA is owned by you and comes with much more flexibility. The money you contribute to an HSA rolls over year after year, can be invested for growth, and remains yours even if you switch jobs or retire. Additionally, to open an HSA, you must have a high-deductible health plan (HDHP), and you can use the funds tax-free for qualified medical expenses.
HSA Contribution and Investment Limits: The IRS sets annual limits on how much you can contribute to your HSA.

For 2025, the limits are:

  1. $4,300 for individuals with self-only coverage.
  2. $8,550 for families.
  3. A $1,000 "catch-up" contribution per year is allowed if you're 55 or older.

You can also invest your HSA funds in various investment options like stocks, bonds and mutual funds once your balance reaches a certain threshold, depending on the rules of your HSA provider.

Can you use an HSA as a savings account? If you've maintained good health and used your HSA sparingly, you can use it as a savings or investment account. The money in an HSA grows tax-free, and after you turn 65, you can withdraw it for non-medical expenses without incurring a penalty. These non-medical withdrawals will be taxed as ordinary income, much like withdrawals from a traditional IRA. This makes the HSA a versatile savings tool that can double as a retirement account if you don't need the funds for healthcare. Before age 65, however, withdrawing HSA funds for non-medical expenses would result in a 20% penalty plus taxes, so it's best to reserve these withdrawals for medical needs until then.

What happens to your HSA if you pass away? If you pass away, your HSA funds don't disappear. If you've designated your spouse as the beneficiary, they can inherit the account and continue using it for qualified medical expenses without tax penalties. However, if your son (or any non-spouse beneficiary) inherits the HSA, the account will be closed, and the balance will be treated as taxable income to him in the year of your death.
In conclusion, an HSA can be a powerful long-term savings tool, especially after age 65, when you can withdraw funds without penalties. If you pass away, your child can inherit the funds, but it’s important for them to account for the tax implications when the time comes.

For more information about managing your finances, check out our resources at OklahomaMoneyMatters.org. If you have money-saving tips you'd like to share, email us at OklahomaMoneyMatters@ocap.org or visit Ask OKMM to submit a personal finance question for a future edition of Financial Friday

Thanks for participating in Financial Friday. Remember, there is always time to take control of your financial future! 

 

The OKMM Team

Financial Friday is a service of Oklahoma Money Matters, the financial literacy initiative of the Oklahoma College Assistance Program, a division of the Oklahoma State Regents for Higher Education.

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