Transferring IRA Money to an HSA
You can make a one-time, penalty and tax-free rollover from your individual retirement account (IRA) to a health savings account (HSA).
Officially known as a qualified HSA funding distribution, which was made possible by the Health Opportunity Patient Empowerment Act, back in 2006.
Key Points.
1. You can only do this once in a lifetime.
2. There is a “testing period” that requires you to remain eligible for the HSA for at least 12 months following the rollover.*
3. You must be eligible for an HSA. That means you must be enrolled in a high-deductible health plan (HDHP).
*If you don’t remain eligible the money you rolled over will count as income when you file your taxes. In addition, the amount will be subject to a 10% penalty.
What Is a Health Savings Account (HSA)?
An HSA is a pre-tax savings plan designed for people with high-deductible health plans (HDHPs).
What makes a Health Insurance Plan High Deductible?
a. Health insurance policies that have annual deductibles of at least $1,400 for individuals and $2,800 for family coverage (as of 2020).
b. Also, the plan’s maximum out-of-pocket limit must be less than $6,900 a year for individuals and $13,800 for family coverage.
c. Premiums don’t count as out-of-pocket costs, but deductibles, copayments, and coinsurance do.
Benefits of an HSA
a. HSA contributions, similarly, to Traditional IRA contributions, are made using pre-tax funds, which reduces your taxable income. You can then withdraw money from your HSA tax and penalty-free if you use it for qualified medical expenses.*
b. After age 65 (or if you have a disability at any age), withdrawals for nonmedical reasons don’t incur the penalty, although they're still taxed at your current income tax rate.
**Withdrawals from an HSA prior to age 65 by individuals who are not disabled, if not used for qualified medical expenses, are subject to a 20% penalty.
It is important to note that The Maximum IRA to HSA Rollover Equals the Maximum Annual Contribution. For 2020, the annual limit on HSA contributions is $3,550 for individuals with self-only coverage under a high-deductible health plan (HDHP). For family coverage, the contribution limit is $7,100. Those with individual or family coverage are also allowed a $1,000 “catch-up” contribution if age 55+.
So why might this make sense to do?
Leaving the money in a Traditional IRA provides tax deferred growth potential for your contributions and a reduction on your current taxable income equivalent to the contribution amount. Then when you withdraw money from the IRA you pay ordinary income taxes on the withdrawal amount. (IRA withdrawals may also be subject to a 10% federal tax penalty if withdrawn prior to age 59 1/2.) With an HSA, if you withdraw funds after age 65, you get an additional benefit in that if you use the money for qualified medical expenses you pay no taxes or penalties on the withdrawals. So if you have no other way to max out your HSA contributions for a given year and can afford to wait an additional 5.5 years to withdraw this money, transferring the money from your IRA to HSA may make sense.
This is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with your financial and tax professionals regarding your personal situation prior to making any financial related decisions. LPL Financial and its representatives do not offer tax advice. (01/20)
Jordan Kerner
Financial Advisor, Waddell & Reed, Inc.
Office: 475-619-2240 | Cell: 917-301-7274 | Fax: 203-557-6262
www.jordankerner.wrfa.com | jkerner@wradvisors.com
495 Post Rd E Ste 209| Westport, CT 06880