HSAs Are One of the Best Accounts You Can Have, and ‘One of the Worst’ Things to Leave Your Kids

A listener named George from the Jersey Shore recently sent a public-service email to The Retirement and IRA Show after an episode on building a retirement liquidity account. His message flagged an underused source of tax-free cash: the health savings account. Host Jim Saulnier agreed, then added the twist that becomes the headline. HSAs are one of the best accounts you can have while you are alive, and one of the worst things to leave a non-spouse heir.

The Liquidity Point George Raised

George’s observation was practical. If you are drawing down assets in retirement and want to avoid a tax hit, an HSA can quietly do the job. In his words, “an additional source of funds that will have no tax impact could be harvesting money from an HSA if you have HSA-eligible expenses, including Medicare B and D premiums, if you need the funds.”

Saulnier said that fits his firm’s working definition of a liquidity account, one that can be accessed “with little or no tax implication.” His standard examples are bank accounts, brokerage accounts, and Roth accounts. He added that George is correct, the HSA would also work. The mechanic is simple: eligible medical expenses, including Medicare Part B and Part D premiums for account holders on Medicare, let you pull HSA dollars out with zero federal tax.

The Inheritance Warning

Then Saulnier pivoted. “HSAs are one of the worst assets to leave to a non-spouse. They’re even worse than IRAs.” That is a strong claim, and the mechanism behind it is what earns it.

Many disciplined HSA owners run what is called the shoebox strategy. You pay medical bills out of pocket during your working years, keep every receipt, and let the HSA compound untouched. Years later you reimburse yourself tax-free from the account against that stack of old receipts. The strategy works for the account holder and for a surviving spouse who inherits the HSA and keeps it as an HSA.

A non-spouse beneficiary is a different story. The HSA loses its status at death and becomes taxable to the heir. The only offset available is unpaid medical debts of the decedent from the year of death. Prior receipts do not qualify, because, as Saulnier put it, “Remember, a receipt by its very definition has already been paid.” “That shoebox of receipts goes wasted when your HSA gets inherited by a non-spouse.” Years of careful documentation evaporate at the moment of transfer.

What This Means for Your Plan

The practical read is that the HSA is a powerful account to spend down during your lifetime, or to leave to a spouse who can continue the strategy. It is a poor asset to earmark for children or other non-spouse heirs. If you are running a shoebox and also planning to leave assets to kids, the accounts you want to preserve for them are generally different: a Roth, taxable brokerage assets that receive a step-up in basis, or life insurance. The HSA is the one you want to drain in retirement, especially once Medicare premiums start hitting.

Context matters here. The personal savings rate has slid from 6.2% in early 2024 to 2.8% in the second quarter of 2026, so any account that lets you build tax-free medical reserves is worth using deliberately.

The Treasury Sidebar

George’s second observation was operational. If you buy Treasuries, going through a brokerage custodian rather than TreasuryDirect.gov makes purchases smoother and keeps tax reporting in one place. Saulnier framed the reason bluntly. Custodians have to compete against each other, so they try to have well-run, intuitive, smart, pleasurable websites. The government portal has no such pressure. “The government doesn’t compete against anybody. If you wanna buy a government bond directly from the government, that’s where you go.” Same bonds either way. Different user experience, and one consolidated 1099 at year end if you route through a broker.

The Takeaway

The HSA sits at both ends of the spectrum. Best-in-class while you are alive: triple tax advantage, no required distributions, and clean access for Medicare premiums. Near the bottom of the list when it lands in a non-spouse heir’s lap. Spend it, or leave it to a spouse. Do not save it for the kids.

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