Thanks to the Health Opportunity Patient Empowerment Act of 2006, you have the right to make a one-time, penalty- and tax-free rollover of funds from an Individual Retirement Account (IRA) to a health savings account (HSA). An HSA, which is an account designed for those who have a high-deductible health plan (HDHP), allows you to make tax-free withdrawals provided the money is used for qualified medical expenses. You can even keep your HSA funds to use later in life after you retire.
Moving funds from an IRA to a health savings account can only be done if you are eligible to make contributions to your HSA. In other words, you need to make the transfer while you are covered by a high-deductible health plan and otherwise eligible to have an HSA. What’s more, the IRA to HSA rollover includes a “testing period” requirement that you remain eligible for your HSA for 12 months following the transfer. This means you must stay in your HDHP at least until the testing period expires.
You can only roll over funds from an IRA to an HSA once during your lifetime. The maximum amount you can roll over is the same as your annual HSA contribution limit for that year. For 2018, someone with a self-only high-deductible health plan (HDHP) can roll over a maximum of $3,450, or $4,450 if you are age 55 or older (2019 limits are $3,500 and $4,500, respectively). If your HDHP provides family coverage, your HSA contribution limit is $6,900, or $7,900 for those 55 or older (2019 limits are $7,000 and $8,000, respectively). Any personal contribution you make to your HSA reduces the amount you can roll over.
Finally, HSAs and IRAs are individual accounts. There is no such thing as a joint IRA or a joint HSA. This means that you and your spouse can each roll over funds from your respective IRAs to your own HSAs, but not to each other’s. You can, however, pay healthcare expenses for each other (or family members) out of either account.
The Benefits with a Traditional IRA
A rollover from a Traditional IRA to an HSA allows you to “fill” your HSA immediately in order to pay for medical expenses tax free. Any nondeductible IRA contributions you may have made are not eligible for the rollover, so they will remain in your IRA, increasing your future tax-free distributions.
Provided you can avoid using the rollover funds until retirement, you will see a tax benefit. Let’s say, for example, that at age 55 in 2018, you roll over the maximum of $7,900. Assuming your HSA returns 6 percent over 10 years (until age 65), at that time you will have $14,148 to spend on medical expenses, tax free. If you left the $7,900 in your IRA and got the same return, you would have just $10,752 after paying taxes (at a 24 percent marginal rate).
Rollovers from Different Accounts
Technically, you can do a rollover from either a Traditional or a Roth IRA to an HSA. However, it’s more advantageous to roll over from a Traditional IRA since withdrawals of contributions from a Roth IRA are already tax- and penalty-free anytime and earnings can be withdrawn tax-free after age 59½.
To roll over funds from other types of retirement accounts, such as a 401(k) or 457, you must first roll those funds into an IRA. Once the funds are in an IRA you can make your one-time, tax-free transfer into your HSA. This type of move is tricky and should be done with the help of a trusted financial adviser.
If you can make contributions to both your HSA and a Traditional IRA, you will lower your adjusted gross income (AGI) and reduce your taxes, and your IRA will continue to grow for retirement. If money is tight and you are 59½ or older, you could take a regular withdrawal from your IRA and use it to contribute to your HSA. The tax bite from the Traditional IRA withdrawal and the tax deduction from the HSA contribution should nearly cancel each other out. Most important, you can do this more than once—in fact, every year if you want.
Think It Over
Clearly the option to roll over IRA funds to an HSA has advantages, but there are disadvantages as well. Since it can only be done once in your lifetime, it’s worth taking some time to think it over. It’s also worth discussing this and the other options, listed above, with your financial adviser. If you decide to move ahead, contact both your IRA and HSA administrators and advise them you wish to make this type of transfer. Finally, remember the 12-month “testing period” and make sure you can remain in your HDHP for a full year after you make the transfer.