Dear Liz: My retirement accounts cover all my expenses including medical expenses. I also have $60,000 in a health savings account invested in mutual funds. I’m struggling with how to spend it. Can I use it for all my current medical expenses or only for unexpected large medical expenses? Or can I keep the HSA as a backup in hopes of leaving it to my heirs. Each option seems to have merit, but I’m stuck. What are your thoughts?
answer: HSAs offer a rare triple tax benefit: Contributions are deductible, the money grows tax-deferred, and withdrawals are tax-free if you have qualified medical expenses.
However, if someone other than your spouse inherits your HSA, it essentially ceases to be an HSA: the account becomes taxable to the beneficiary in the year you die, which means the HSA loses one of its three tax breaks.
Inheriting a taxable account is probably better than not inheriting anything at all, but you’re generally better off using the HSA yourself or leaving it to your spouse and designating other money for heirship.
Figuring out the optimal rate at which to spend this money is obviously tricky — the longer you leave it, the more it can grow — but the longer you live without the money, the greater the risk you run of dying without taking advantage of those tax-free withdrawals.
If you’re hesitant to tap your HSA, give yourself the option of a “deathbed drawdown”: By keeping good records, you may be able to empty your account at the last minute and avoid taxes.
As you may know, you do not have to make any qualified medical expenses in the year you make an HSA withdrawal in order for the distribution to be tax-free. If you incur expenses after the establishment of your HSA but before your death, a tax-free withdrawal is justified unless the expenses are paid by insurance or used to reimburse you for a previous HSA withdrawal. Therefore, keep careful records of all medical expenses you pay out of pocket. If you get a bad diagnosis or your health starts to deteriorate, you can use those receipts to justify a tax-free withdrawal.
Calculating Social Security Benefits When a Long Marriage Ends
Dear Liz: I was married for 18 years before filing for divorce. I am 71, my husband is 76 and still working full time. He received Social Security until he was 70. The Social Security Administration told me to wait to file until I had collected the maximum amount. When I did, they told me that 50% of his benefits were less than my own benefits. Therefore, I am not eligible to receive benefits as a divorced spouse. I only get $1,200 per month. I make about $30,000 a year and he makes six figures. I don’t understand Social Security. We are barely getting by.
answer: You’ve got bad news. Divorced spousal benefits, like spousal benefits for people who are still married, are based on the principal worker’s benefit at full retirement age. Spousal and divorced spousal benefits are not eligible for the delayed retirement credit, which increases benefits if a worker delays filing for Social Security after full retirement age. In other words, you couldn’t benefit from your ex’s delayed start.
However, like other retirement benefits, spousal and divorced spouse benefits are reduced if the claimant begins benefits before their own retirement age. For example, if you filed at age 65 and your full retirement age was 66, you would not be eligible for the maximum divorced spouse benefit. Your own retirement benefit was also reduced. If you had been able to wait to file until you reached full retirement age, your own benefit could have increased by 8% for every year you waited until age 70.
Given the difference in income, it may seem odd that your benefit would be greater than what his record would suggest. But Social Security is designed to replace a larger share of the income of low-wage workers than high-wage workers, on the premise that low-wage workers have a harder time saving for retirement. His income in recent years may have been four times what you were making, but his Social Security benefit would not be double, let alone four times.
Of course, what’s done is done, but there may be greater benefits in the future: If he dies before you, you will be eligible for divorced spousal benefits, which will be 100% of his benefit (the benefit he would receive upon his death, plus delayed severance pay and cost of living increases).
Liz Weston, Certified Financial Planner®, is our personal finance columnist. Questions can be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact Us” form below. .
