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Handling health savings accounts in a divorce

Many people have taken advantage of health savings accounts. They allow Americans to deduct tax-exempt money from their paychecks and put it away to pay for medical care.

One of the advantages of HSAs is that the money doesn't have to be used right away. It can accumulate and be used later in life, even when you're no longer allowed to contribute to it. That can be extremely beneficial to help pay for medical care in your senior years when you're more likely to have greater medical expenses.

Therefore, people who are divorcing in their later years may have a significant balance in their HSA that needs to be factored into the assets to be divided. It's essential to disclose your HSA balance and for your spouse to disclose his or hers in the divorce proceedings so that you can handle this money in a way that will be the most advantageous and least likely to require unnecessary tax penalties.

Generally, if the funds in an HSA are transferred, they aren't taxable. This can be accomplished by a trustee-to-trustee transfer. Each scenario is unique, however. For example, if your spouse stays on your health insurance plan for a time and you use your HSA money to pay for your ex's health care, you will pay a tax penalty (unless you're over 65).

If you have children whose health care you pay for, you can use your HSA money to cover eligible medical expenses for them without a penalty. That's the case regardless of who has custody of them or claims them as dependents.

As with retirement and investment accounts, you'll likely want to change the beneficiary for your HSA when you divorce, if it's your spouse. You should discuss your beneficiary changes with your family law attorney as well as your estate planning attorney, if you have one. These changes are necessary even if you make the changes in your will.

Source: Morningstar, "Handling HSAs After Death or Divorce," Helen Modly, CFP, CPWA and Tommie Monez, MBA, CFP, ChFC, Oct. 22, 2016

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