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Robert A. Di Ieso, Jr.

Q: What's the best thing to do with my HSA funds when I retire and go on Medicare? Are there any rules that say I need to spend it since I won't have a high-deductible health plan any longer? -- Corky Bradley, Fort Collins, Colo.

A: There are no rules requiring you to spend your existing HSA balance or take any IRA-like required minimum distributions once you become a Medicare beneficiary, says Paul Fronstin of the Employee Benefit Research Institute. And because these accounts grow tax-free, there's no real hurry to spend it down.

But be aware that you will not be able to add any new contributions to your existing HSA once you leave the high-deductible health plan.

Because you won't pay income tax on any HSA distributions that are used for qualified medical expenses, it makes the most financial sense to continue to use this money for health care needs, says Fronstin. If you are over 65, you can even use your HSA funds to pay for Medicare insurance premiums, although premiums for Medicare supplemental insurance (aka Medigap) are not viewed as qualified expenses.

If you withdraw the money for non-medical expenses prior to age 65, you will face a 20% penalty on the sum and it will be taxed as part of your income, says Fronstin. Once you've turned 65, you can withdraw your HSA money for any expenses without triggering a penalty—but you will still owe income tax on the withdrawals. "In those cases, the HSA is similar to a 401(k) or IRA," says Evansville, Ind., financial planner Terry Prather. Such non-medical expenses are "usually not the best use of the account," Prather says.

You can also take money out of your HSA to reimburse yourself for qualified medical expenses that you incurred—but did not pay for from your HSA—at any point after the account was established, says Atlanta financial planner Jason Lina. "Save invoices and bills for past medical expenses that were not paid for from the HSA, and then reimburse yourself for these expenses from the HSA 20 years from now," Lina says.

One caution: You should try to spend down the balance by the end of your life, or a surviving spouse's. Non-spouse beneficiaries do not inherit the HSA's favorable tax treatment; rather, the HSA's assets get treated as taxable income.