For the first time, I signed up for a high-deductible insurance plan along with a health savings account. However, I don’t understand a couple of important concepts. When our medical bills come due, do we pay with our personal credit card or the HSA card provided by my employer? We have no problem using our personal card, but is that the right way to use an HSA—by not using it, in effect? Also, I have read that unused HSA funds can be invested to increase tax-deferred. How will the money be invested? Does my employer have a relationship with a specific broker? Or can I invest unused HSA funds with any broker?
Answer: If you want to grow your HSA balance for retirement, then paying your medical bills out of pocket is the way to go. If you use your credit card to pay medical bills, however, make sure you pay off the balance in full. The benefits of an HSA can be diluted if you’re paying double-digit interest rates.
If you need to access your HSA funds, you can use your employer-issued card to pay medical bills or submit receipts to the HSA administrator for reimbursement.
As you may know, HSAs offer a unique triple tax break. Contributions are pre-tax, your account can grow tax-deferred, and withdrawals for qualifying medical expenses are tax-free. Because the account can be invested and the balances roll over each year, many people treat their HSAs as an additional way to save for retirement.
Your employer chooses an HSA provider that usually offers several investment options, but you can usually transfer your balance to another provider if you want. Compare fees, minimum balance requirements, and investment options. If you decide to transfer your account, ask your current provider to set up a “trustee-to-trustee” transfer.
Transfer of bonds after death of spouse
Dear Liz: In 2001, I purchased $50,000 worth of I Bonds. Half of them are in my name with my wife as the beneficiary; the other half is in his name with me as the beneficiary. He died two years ago, but I don’t want to cash his bonds. How can I get it in my name without selling it?
Answer: You can reissue the bonds in your name only because you are the named beneficiary. The reissued bonds are available in electronic form, so if you don’t already have one, you’ll need to create an account with TreasuryDirect, which is run by the US Department of the Treasury. If you have questions, you can reach the site’s call center at (844) 284-2676 from 8 a.m. to 5 p.m. Eastern Monday through Friday.
Clarification of required minimum distribution
Dear Liz: When my wife reached age 59, we began requiring minimum distributions for all of her retirement funds. During the process, the investment company representative stated that while he was still working and contributing to his 401(k) and 403(b) at work, he did not need to take RMDs for the accounts. With all the recent changes in the types of accounts, is that still the case, or has the law changed?
Answer: Minimum distributions are not yet required at age 59½ from any retirement fund. That’s the age at which people no longer have to pay penalties for accessing their retirement funds, not the age at which they have to start withdrawing money.
The current age at which retired minimum distributions must begin is 73, and it increases to 75 for people born in 1960 and later. If your wife is still working at that point, she can defer RMDs from her current employer-sponsored retirement plans. RMDs are still required for other retirement accounts, such as IRAs and 401(k)s or 403(b)s from former employers. The other RMD exception is for Roth accounts, which have no RMDs for the account owner.
You generally want the money to stay in tax-deferred retirement accounts for as long as possible. Unnecessary distributions only increase your tax bill and reduce the amount you have to live on later in life.
If your wife has already taken a distribution, she has 60 days to roll it into an IRA and avoid taxes.
Tax law can be confusing and mistakes can be costly. Please use this experience as a reason to hire a good tax pro who can answer your questions and make sure you don’t make another potentially costly misstep.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Inquiries can be sent to him at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form on asklizweston.com.