May 12, 2026
Health savings accounts (HSAs) are tax-advantaged accounts designed to help people cover costs for health care services, but some smart planners treat them as one of retirement's best-kept secrets. However, they also come with a tax trap most people don't see coming.
HSAs are often called "triple tax advantaged" accounts because contributions go in tax-free, grow tax-free, and can be withdrawn tax-free for qualifying medical expenses. There's another advantage: Once you hit 65, you can use the HSA for any expenses at the normal tax rate. (1)
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Despite their many advantages, Ryan Greiser, a CFP and co-founder (2) of Opulus, a Pennsylvania-based financial advisory firm, says HSAs can create "a huge problem" for heirs that is "rarely talked about."
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If you have an HSA or stand to inherit one, this challenge is worth understanding and making moves to alleviate.
How financially savvy people use HSAs — and what that can mean for heirs
Those who have a high-deductible health care plan can open an HSA account. They allow workers to set aside pre-tax money to use for healthcare expenses, up to a set limit. For 2026, the maximum annual contribution limits are $4,400 for self-only coverage and $8,750 for family coverage. Those aged 55 or older can (3) contribute an additional $1,000 to their HSA.
HSAs are not use-it-or-lose-it (4) plans, meaning the funds in them can be rolled over each year. Most HSAs also allow you to invest the funds, further growing your funds.
Because of the tax advantages, many choose to pay for medical expenses out of pocket, keep receipts, and let their HSA continue to grow. If they need funds down the road, they can use the receipts to pull funds at any time. Once retirement hits, the HSA serves as a medical expense nest egg. And when you consider that the average 65-year-old retiring in 2025 can expect to spend around $172,500 (5) in medical expenses throughout their retirement, that nest egg can come in handy.
The issue, experts warn, is what happens after you pass away. For spouses, it transfers as an HSA with the same tax benefits. But if the account transfers to a non-spouse, it loses its tax benefits and becomes taxable income.
Heirs who inherit a large HSA as a non-spouse could be pushed into the highest marginal tax bracket for the year they inherit. In 2026, that is 37% (6), which means a $50,000 HSA inherited by a non-spouse could come with a tax bill of $18,500.
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How to reduce HSA tax bills for your heirs
Understanding what happens to your HSA is the first step. Now let's talk about how to reduce the potential tax bill for your heirs.
Spend it now
If your HSA has grown into a sizable balance, the simplest solution is to start using it. Carolyn McClanahan, a CFP and founder of (7) Life Planning Partners, put it plainly: "If you know you have that big an HSA, start spending it. There's no reason to keep a huge HSA if you don't have a good plan for beneficiaries."
That might mean using it to cover medical costs you'd otherwise pay out of pocket for, or to make planned purchases like hearing aids, dental work or vision care.
Consider donating to a charity
Leaving your HSA to a qualified charity is another option. (8) Charities generally won't owe taxes, so the full balance can go to the cause rather than the IRS. Heirs can also choose to make this move after they inherit.
Split the amount between multiple heirs
Rather than leaving the entire account to one person, consider spreading it among more beneficiaries, thereby diluting the tax burden. A $100,000 HSA inherited by one person is a much bigger problem than the same amount split among five people. Just make sure your heirs know what's coming. McClanahan (9) recommends notifying beneficiaries in advance so they can plan accordingly.
Use it to pay unpaid medical expenses
Non-spouse heirs have one more tool available: they can use the inherited HSA to pay any outstanding medical expenses of the deceased, and only owe tax on whatever remains. This must happen within 12 months of the account (10) holder's death. On a $50,000 HSA with $10,000 in unpaid bills, for example, heirs would only owe tax on $40,000, potentially saving thousands depending on their bracket.
HSAs can be a helpful retirement planning and health care tool, so long as the tax trap doesn't become your family's problem to solve. Talk to a financial planner, update your beneficiary designations and loop your heirs in now, while there's still time to plan.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our ethics and guidelines.
Fidelity (1),(4),(5); CNBC (2),(7),(8),(9),(10); U.S. Congress (3); Tax Foundation (6)
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Danielle is a personal finance writer whose work has appeared in publications including Motley Fool and Business Insider. She believes financial literacy key to helping people build a life they love. She’s especially passionate about helping families and kids learn smart money habits early.
