Move IRA money to an HSA with a qualified HSA funding distribution
- You can make a one-time distribution of funds from your IRA into a health savings account (HSA).
- A “testing period” requires you to remain eligible for the HSA for at least 12 months following the rollover.
- To be eligible for an HSA, you must be enrolled in a high deductible health plan (HDHP).
- Rolling over from a traditional IRA (instead of a Roth) typically offers the better tax benefit.
Thanks to the Health Opportunity Patient Empowerment Act of 2006, you can make a one-time, penalty- and tax-free rollover of funds from your IRA to a health savings account (HSA). The move is officially known as the qualified HSA funding distribution.
What Is a Health Savings Account (HSA)?
An HSA is designed for people with high-deductible health plans (HDHPs). Those are health insurance policies that have annual deductibles of at least $1,350 for individuals and $2,700 for family coverage. Also, the plan’s maximum out-of-pocket limit must be less than $6,750 for individuals and $13,500 for family coverage. Premiums don’t count as out-of-pocket costs.
You can withdraw funds from your HSA tax-free if you use the money for qualified medical expenses. If you’re 64 or younger, you’ll owe taxes and a 20% penalty if you use funds for nonmedical reasons. However, after age 65 (or if you’re disabled at any age), withdrawals for nonmedical reasons don’t incur the penalty. But those withdrawals are still taxed at your current tax rate.
You can keep your HSA funds in the account to use later in life after you retire. The account—and all the money in it—are yours even if you change health insurance plans, change jobs, or retire.
Fast Fact: 95% of HSAs have funds left at the end of the year to use for future expenses.
IRA to HSA Rollover Rules
You can move funds from an IRA to an HSA only if you’re eligible to make contributions to your HSA. In other words, you need to make the transfer while you’re 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.
If you don’t remain eligible (for example, you switch to a non-HDHP), you’ll have to include the money you rolled over as income when you file your taxes. In addition, the amount will be subject to a 10% penalty.
Fast Fact: Only 13% of HSA account holders contribute the maximum limit to their HSAs.
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 2019, the limits are:
- $3,500 for individuals, with an additional $1,000 catch-up contribute if you’re age 55 or older.
- $7,000 for family coverage, with the same $1,000 catch-up contribution.
Finally, HSAs and IRAs are individual accounts. There’s 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 (and other family members) out of either account.
Traditional IRAs Benefit More
A rollover from a traditional IRA to an HSA allows you to “fill” your HSA immediately 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’ll see a tax benefit. Let’s say, for example, that at age 55 in 2019, you roll over the maximum of $8,000. Assuming your HSA returns 6% over 10 years (until age 65), at that time you’ll have $14,327 to spend on medical expenses, tax-free.
If you left the $8,000 in your IRA and got the same return, you would have just $10,889 after paying taxes (at a 24% marginal rate).
HSA Rollovers from a Different Account
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. That’s because withdrawals of contributions from a Roth IRA are already tax- and penalty-free anytime, and you can withdraw earnings tax-free after age 59 ½.
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 advisor.
Other Ways to Fund an HSA
If you can contribute to both your HSA and a traditional IRA, you’ll 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’re 59 ½ 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.
You Can Do an IRA to HSA Rollover Just Once
Rolling IRA funds into an HSA has its 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 advisor.
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 remain in your HDHP for a full year after you make the transfer.