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How to divide a health savings account during a divorce

Property division is a primary focus for most divorcing spouses in Colorado, and for good reason. The outcome of the division of marital wealth will shape the financial lives of both parties for many years to come. That is why it is so important to account for all asset types during the early stages of a divorce. Failing to recognize or account for assets could mean that the value of those assets is lost. A prime example lies in health savings accounts, (HSAs) which are very often left out of the property division discussion.

A health savings account is an account that allows individuals to set aside money for anticipated health expenses without subjecting those funds to taxes. There are limits to the amount of money that can be placed in these accounts each year. Individuals who put money into an HSA can withdraw those funds for qualified medical expenses over the course of many years, even after they are no longer eligible to place money into the account, such as after retirement. Over the course of time, an HSA can turn into a valuable asset.

During a divorce, an HSA is handled in much the same way as an IRA. Interest in the account can be transferred from one spouse to the other. Best of all, the spouse who receives a share of the account is able to continue to use those funds as an HSA, which avoids a tax burden. The recipient has the right to move the account to a new administrator or trustee, or can leave it in place.

Colorado spouses also have a great deal of flexibility in how they deal with an HSA during and after their divorce. In some cases, one spouse will be required to keep the other on his or her medical insurance plan for a set amount of time following a divorce. They cannot use funds from their own HSA to cover medical expenses for the former spouse, but they can continue to make contributions to the HSA account of their ex, while keeping the tax deduction. By working with a divorce attorney, spouses can reach a property division agreement that provides the best for their particular set of needs.

Source: morningstar.com, "Handling HSAs After Death or Divorce", Helen Modly, June 15, 2017

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