Health savings accounts have many advantages, but you could expose yourself to potential penalties if you are not careful.

Health savings accounts (HSAs) are personal investment accounts from which people can pay for qualified medical and dental expenses on a pretax basis. If you make a withdrawal for expenses that are not “qualified,” you may be subject to a penalty of up to 20%. Qualified medical expenses are defined in IRS Publication 502.

One of the advantages of HSAs is that you can name your spouse as the beneficiary. This allows a surviving spouse to continue to use withdrawals for qualified medical expenses without incurring penalties. As long as the beneficiary is a spouse, the earnings of the investments in the account will continue to be tax-deferred. A surviving spouse can use the HSA with any type of healthcare plan. If they have an HSA eligible insurance plan, they can continue to make contributions to the plan.

If you name someone other than a spouse as the beneficiary, then the individual who inherits the account will immediately be subject to income taxes on the balance of the account. The account then is no longer an HSA. Since any beneficiary other than a spouse will be immediately subject to income tax, you may want to consider the tax bracket of any potential beneficiaries.

You have the option to name a qualified charitable organization as the beneficiary of some or all of the value of your account. Qualified charities do not incur income taxes.

In 2024, you can contribute up to $4,150 if you have self-only coverage; if you have family coverage, you can contribute as much as $8,300. Individuals 55 and older can contribute an extra $1,000 in 2024. There is a 6% excise tax on any excess contributions you fail to remove.

When you reach 65 and apply for Medicare, you no longer have the advantage of making contributions to your HSA. You can still withdraw funds from your account for qualified medical expenses, but if you make withdrawals for any other reason, the withdrawals are taxable at ordinary income tax rates; at that point there is no penalty associated with the withdrawal. You should make sure that you or your employer stop making contributions for the six months prior to reaching 65; otherwise you would be subject to penalty for over-funding the account.

If you are receiving Social Security benefits at 65, you will be automatically enrolled in Medicare Part A (Hospital Insurance). In that case, even if you continue to work after 65, you will not be able to continue to contribute new funds to your HSA. You do not have to apply for Part B (Medical Insurance) or Part D (Prescription Drug Insurance) if you continue to work after 65, if your health insurance costs are covered by your employer or the employer of your spouse. In that case, you are allowed to enroll in Part B and D without a late enrollment penalty in a “Special Enrollment” period during an eight-month period related to when you are no longer employed or covered by employer insurance.

I recommend that you obtain the latest issue of “Medicare and You,” (published annually) which explains the details associated with any possible late enrollment penalties when you postpone applying for parts of Medicare at age 65 because you are continuing to work after 65, and your insurance was covered by employers other than Medicare. You can obtain a copy from Medicare.gov or by calling 1-800-Medicare. You can receive a printed copy or an electronic file, based on your choice.

Bottom line: HSAs are very beneficial as long as you avoid penalties. Make sure all of your withdrawals are for qualified medical expenses. Avoid overfunding. Your most cost-effective beneficiary is your spouse. If you work after 65, and are covered by employer health insurance, avoid late enrollment penalties by using special enrollment periods.

(Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.)