In addition to making tax-free payday contributions, your HSA comes with other funding options. Learn more about ways to build up your tax-advantaged account, including funding your HSA from other accounts.
Owning a Health Savings Account (HSA) comes with many perks. HSA owners make tax-free contributions, earn tax-free interest and investment income, and use the money tax-free for qualified expenses. They can also use the money for not only themselves, but also their dependents. And unlike a Flexible Spending Account (FSA), HSA participants own the account and can use their funds even after they leave their employer.
When it comes to account funding, HSA owners have several options available beyond traditional payday contributions. Here are a couple of alternative ways to fund your tax-advantaged account, including transferring funds into your HSA from other accounts.
Options for Funding Your HSA
One of the biggest benefits of an HSA is that there are many ways to supply the account. For one, your employer can make contributions to the account in addition to any you make on your own. Once the money gets deposited in your account it is yours to use in perpetuity; there is no “use it or lose it.”
Another advantage is that HSAs allow contributions made from transferring or rolling over funds from other types of accounts. These accounts can include IRAs, 401k plans, and even another HSA. Transfers and rollovers from other accounts can be especially beneficial when using your HSA to supplement your regular retirement savings. To understand how this works, let’s examine the difference between a transfer and a rollover.
Moving money from one HSA account to another seems like it should be a relatively simple transaction. However, in the highly regulated world of healthcare accounts, it’s important to know the restrictions, rules and regulations that govern these transactions. There are two ways to move money between separate HSA accounts: transfer and rollover.
What is an HSA transfer?
A transfer is when account holders complete a transfer form (generally provided by the new administrator) and submit it to the previous administrator. The two administrators cooperate directly to ensure the money is moved between accounts; the account holder does not take possession of the money during this transaction.
When utilizing an HSA-to-HSA transfer:
- You must own both accounts. You are not allowed to receive money from someone else’s HSA – even one belonging to your spouse.
- The transfer of HSA funds deposited in previous years does not affect your current year contribution limits
- You can make an unlimited number of transfers in any given year
With an HSA rollover, the process is slightly different. In this scenario, the account holder receives the funds from the previous administrator to give to the new administrator. With HSA rollover, the following rules apply:
- When you receive funds directly from the custodian or trustee, the IRS considers it a distribution, which may involve additional tax reporting requirements. To avoid paying taxes or penalties, you must deposit the funds into your HSA within 60 days of receipt
- A rollover contribution is not included in the tax payer’s income, is not deductible, and does not count towards the annual contribution limit
- HSA rollover can take place once per year, starting on the date the account holder receives a distribution to be rolled over. If you make a rollover distribution on March 1, then you have to wait a full twelve months to March 1 of the following year before you can make another rollover.
Transferring IRA Funds to an HSA
Here’s another big advantage of Health Savings Accounts: you can utilize other savings accounts to help maximize contributions. This can be especially beneficial if you don’t have the cash flow, or if you have very few medical expenses, but want to contribute to your HSA in order to build supplemental retirement savings. By law, you can transfer money from a traditional or Roth IRA into your HSA without penalty or tax – with a catch.
You can only make this type of transfer once in your lifetime; this option merits careful consideration before taking advantage of it. In addition to the one-time usage, other considerations include:
- You must own both the IRA and the HSA
- The transfer counts toward the annual contribution limit
- The transaction must be trustee to trustee
- You can’t transfer your IRA funds to a spouse’s or partner’s HSA account
Why is this important? If you use your traditional IRA to pay for medical expenses (or any other reason), you have to pay taxes on the withdrawal. If you’re under age 59 ½, you may have to pay a 10 percent penalty.
Restrictions on Funding Your HSA from Other Accounts
Currently, you cannot transfer money from a 401(k), 457 or other type of retirement plan. However, if you have a 401(k) from a former employer, you may be able to roll those funds into a traditional IRA and then transfer it to your HSA. You can also transfer funds from a SEP (self-employed plan) or Simple IRA as long as the plan is no longer considered ongoing.
You have options when it comes to funding your HSA. When making any type of transfer or rollover involving your HSA, always consult with your HSA and retirement account administrators to avoid making mistakes that can cost you in the long run. IRS Publication 969 offers valuable information that can inform and guide any HSA transfer decisions you make.
DataPath Summit features all-in-one HSA administration, with HSA management, custodial banking, and investments in a single solution.