Individual Retirement Accounts (IRAs) are the primary retirement saving vehicle for those without access to 401(k) plans through employers. Traditional IRAs provide an upfront benefit as contributions are tax-deductible; Roth IRAs provide the tax benefit at withdrawal. While contributions to a Roth IRA can be withdrawn up to the principal amount, contributions to traditional IRAs can’t be touched without penalty until age 59.5. On the other hand, Health Savings Accounts (HSAs) aren’t as well-known (or utilized) as IRAs, but they can be used in conjunction should you need to access money for medical expenses and don’t want to pay taxes or penalties.
Read on for your guide to one-time IRA to HAS rollover transfers. If you have any additional questions, contact our team at Good Life Financial Advisors of Mt. Pleasant. Our team of experts is here to help you plan for the future!
What Is a Health Savings Account (HSA)?
An HSA is an individual investment account aimed at helping retirees with medical expenses. Contributions to an HSA are tax-deductible up to a certain amount, and growth and withdrawals are tax-free. To open an HSA, you must have a high deductible health insurance plan.
The HSA contribution limit depends on the type of high deductible health insurance you have. An individual plan allows taxpayers to contribute up to $3,650 annually ($4,650 if over 55) to an HSA. If you have a family health plan, the contribution limit rises to $7,300 ($8,650 if over 55). There are no income limits on HSA contributions – even high earners can make tax-deductible contributions to an HSA (as long as they have a high deductible health insurance plan).
No taxes are due on contributions, accrued interest, or withdrawals if the funds pay for qualified medical expenses, including a broad range of physical, dental, and mental health services (see IRS Publication 502 for a definitive list of what qualifies). In addition, HSAs can be carried indefinitely, regardless of how much money is in the account or whether the owner changes jobs or health insurance providers.
How Does an IRA to HSA Rollover Transfer Work?
In 2006, the Health Opportunity Patient Empowerment Act became law. It allowed money to be transferred from an IRA to an HSA without incurring taxes or penalties. Called a ‘qualified HSA funding distribution,’ this technique provides a trustee-to-trustee rollover of IRA funds into an HSA. No taxes are due on the rolled-over money as long as it came from a deductible IRA contribution.
To initiate this transfer, you must be eligible to contribute to an HSA – which means you must have a high deductible health insurance plan and be ineligible for Medicare. You also must remain eligible for an HSA for a full 12 months after the transfer. If you switch to a health plan with a low deductible, the rollover transfer will become taxable. Nonqualified contributions to an IRA cannot be rolled over, although the transfer can come from either a traditional, Roth, or SEP IRA. If rolling over money from a Roth, you’ll need to use interest or investment gains, not principal, to fund the transfer.
Here’s the most crucial aspect of this provision: the IRA to HSA rollover transfer is a one-time-only deal. You get one such transfer per lifetime, regardless of how many IRAs you own or the years you’ve been on a high-deductible plan. The maximum transfer amount is equal to the contribution limit of the HSA – $3,650 for individual plan members, $7,300 for family plan members, plus an extra $1000 if you’re over 55.
Benefits and Drawbacks of Using an IRA to HSA Rollover Transfer
A qualified HSA funding distribution will make more sense for some people than others. The primary benefit would come to those who need money for qualified medical expenses but haven’t yet funded an HSA. In this scenario, the IRA to HSA transfer provides tax-free funding for these medical expenses without suffering early withdrawal penalties from the IRA.
Of course, there are drawbacks to this one-time transfer as well. For starters, a high deductible health insurance plan is less than ideal for many investors. A high deductible means the health plan must have a $1,400 deductible for individuals or a $2,800 deductible for families. So to contribute to an HSA, you’ll need to pay some steep deductibles first. And if you come off the high deductible plan less than 12 months after making the transfer, you’ll find yourself stuck with a tax bill. Secondly, this is a once-in-a-lifetime transfer. Once you’ve used your IRA to HSA rollover, you won’t get a second one regardless of your circumstances.
When might a transfer like this make sense? For example, if you know a significant medical expense is coming, you might want to complete the transfer first so you can tap a well-capitalized HSA to cover your bills. Or perhaps you have a well-funded IRA but wish to kickstart the funding of an HSA. Using the one-time transfer allows you to build your HSA balance without contributing any income from your paycheck or savings. As always, check with your advisor first and ensure an IRA to HSA rollover transfer is the best use of your capital.
Get the Help You Need at Good Life Mt. Pleasant
Good Life Financial is a leading financial advisor firm in Mt. Pleasant, SC. We offer personalized wealth management and financial planning services to help our clients pursue their unique financial goals.
If you have any additional questions about one-time IRA to HSA rollover transfers, contact our team today.
The opinions voiced are for general information only and are not intended to provide specific tax advice or recommendations for any individual.