The recently signed Setting Every Community Up for Retirement Enhancement (SECURE) Act should make saving for retirement more accessible and achievable to the general public. However, the act throws a wrench into a common estate planning vehicle, the “stretch IRA.”

Before the SECURE Act, IRA beneficiaries were able to extend required minimum distributions on their inherited IRAs over their entire lifetimes, allowing more opportunity for tax-free fund growth. Now, all IRA beneficiaries except spouses must use up all the funds in their inherited IRAs within 10 years.

By creating a depletion date on “stretch IRAs,” Congress has limited their effectiveness as a means of tax-free bequests. However, individuals can take advantage of a little-known provision in health savings account (HSA) legislation to provide tax-free funds to their beneficiaries. 

While most HSA contributions are made by individual account holders, anyone can make contributions into an eligible account holder’s HSA on their behalf. The individual making the contribution doesn’t have to be HSA-eligible himself; all that matters is that the account holder is. That means a parent could fund their child’s HSA annually up to the IRS contribution limit, giving the child a tax-free windfall that could be used to pay for current medical expenses or invested for the future. And, the parent’s HSA contributions are tax-deductible for their child, even if they don’t itemize their deductions. Talk about a gift that keeps on giving!

Here’s how it works: HSAs are tax-advantaged medical savings accounts that allow account holders to save money on health-care costs for themselves and their families. Account holders can use their funds to pay for current medical expenses, or they can invest them and create medical nest eggs to cover future health-care costs.

To open an HSA or contribute to an existing account, account holders must meet a few eligibility requirements, such as not being listed as a dependent on someone else’s tax return. Eligible HSA account holders can contribute up to $3,550 in 2020 if they are only ones covered under their health insurance plan, or $7,100 if anyone else is covered under their plan. 

Those HSA contributions are either tax-free or tax deductible, depending on how they’re contributed. In addition, HSA funds grow tax free, and withdrawals for qualified medical expenses are tax-free as well. This combination of tax advantages means HSA account holders can save more money on their health-care costs than anyone else.

By contributing to their child’s HSA over time and letting compound interest and investment returns do their work, parents can provide a safety net for their child against any unexpected medical expenses. And since HSAs don’t have required minimum distributions, those funds can keep growing until they’re needed.     

Erik Eckard is the senior relationship manager at HealthSavings.com.

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