Health Savings Accounts are popular tools for managing healthcare costs and retirement planning. HSA account owners can access their HSA balances tax-free to pay eligible healthcare expenses and invest for growth over time. Did you know that if you have an IRA, you can make a one-time funds transfer into your HSA account?
Doing so gives you the “triple-tax advantage” on the transferred funds, but there are a few things to consider.
What is an IRA?
Congress created IRAs, or Individual Retirement Accounts, nearly 50 years ago. They allow tax-deferred savings and investments for retirement. Some are opened directly by individual owners, while others are part of employee benefit programs.
IRAs and HSA Transfers
If the HSA account owner also owns a funded IRA (traditional or Roth), they can transfer IRA funds into the HSA account up to the maximum annual HSA contribution limit. However, you can only transfer once in a lifetime, and specific requirements apply.
To make an IRA balance transfer, the HSA account owner must meet the standard HSA account active contribution requirements, including:
- Currently enrolled in a qualifying High Deductible Health Plan (HDHP)
- Not currently enrolled in Medicare
Additionally, the HSA account owner must meet a “12-month testing period” requirement:
- Remain HSA-eligible for up to 12 months after the IRA-to-HSA transfer (or taxes and penalties may apply)
When combined with HSA contributions from any other sources, the amount transferred from the IRA cannot exceed the current year’s maximum annual HSA contribution limit. (Exceeding the annual contribution limit triggers penalties for the HSA account owner.)
Your financial advisor can help you decide the best time to transfer based on your circumstances. Most transfers occur either to fund a new HSA account, to create a cushion for emergencies in a low-balance HSA account, or to consolidate assets when retirement is on the horizon. Standard procedures include:
- The IRA custodian initiates the transfer as a trustee-to-trustee transaction to the HSA custodian.
- Since the transfer is a once-in-a-lifetime event, it may not be available as an online transaction.
According to the Journal of Accountancy, some financial advisors recommend transferring only from a traditional IRA (instead of from a Roth IRA) due to potential tax liabilities. While it is always advisable to check with your financial advisor before transferring funds, owners of Roth IRAs are particularly encouraged to do so.
IMPORTANT NOTE: The above is for informational purposes only and should not be construed as legal advice. For more information and context on the IRA-to-HSA transfer option, including the above provisions and others, consult your qualified benefits counsel.
DataPath, Inc. creates innovative solutions for tax-advantaged, post-tax, and compliance benefits administration, including FSAs, HRAs, HSAs, LSAs, COBRA, and more. Please enter your email (above right) to be notified when new blog articles are published.