Health Savings Accounts (HSAs) help employees manage their healthcare costs while also planning for retirement. Account owners can access their balances tax-free to pay for eligible healthcare expenses and invest unused funds for growth over time.
But did you know that account owners can also make a one-time transfer from an IRA into their HSA account? While doing so provides a “triple-tax advantage” on the transferred funds, there are a few things to consider.
IRA Basics
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.
IRA-to-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, HSA owners can only do this once in their lifetime, and specific requirements apply.
To make an IRA balance transfer, HSA account owners must meet the standard requirements for active HSA contributions, 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 yearly contribution limit triggers penalties for the HSA account owner.)
Transfer Considerations and Procedures
Financial advisors can help HSA account owners decide the best time to transfer based on their specific 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.
Typically, 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 a Roth IRA) due to potential tax liabilities.
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IMPORTANT: 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 or financial advisor.
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