Transferring IRA Money to an HSA

Did you know you can transfer money from your Individual Retirement Account (IRA) to a Health Savings Account (HSA) one-time, penalty-free and tax-free? This process is officially known as a qualified distribution of HSA funding and was made possible by the Patient Health Opportunity Act of 2006.

What is a Health Savings Account (HSA)?

A health savings account (HSA) intended for people with High Deductible Health Plans (HDHP). These are health insurance policies with an annual deductible of at least $1,600 for individuals and $3,200 for family coverage for 2024 ($1,650 and $3,300 in 2025).

Here are a few key numbers you need to know about HSAs:

• In 2024, annual maximum out-of-pocket expenses must be less than $8,050 for individuals ($8,300 in 2025) and $16,100 for families ($16,600 in 2025).
• The annual contribution limit for individuals is $4,150 for 2024 ($4,300 for 2025) and $8,300 for families ($8,550 for 2025).

Remember that your bonuses do not count personal expensesBut franchisescopayments and coinsurance.

You contribute to an HSA using pre-tax funds, which lowers your expenses. taxable income. You can then withdraw money from your HSA. tax-free if you use it for qualified medical expenses. However, if you are 64 or younger, you will owe taxes and a 20% penalty if you use the funds for non-medical reasons. Withdrawals for non-medical reasons do not incur a penalty after you turn 65 or if you become disabled at any age, although they are still taxed at your current tax rate.

You can save your HSA funds in the account for use later in life, e.g. after you retire. The account (and all the money in it) belongs to you, even if you change health insurance plans, change jobs or retire.

Rules for rolling over an IRA to an HSA

You can transfer funds from an IRA to HSA only if you are eligible to contribute to an HSA. In other words, you need to make the transfer while you are covered by the HDHP and are eligible for an HSA.

What’s more, converting from an IRA to an HSA includes a testing period that requires you to remain eligible for an HSA for 12 months after the switch. This means you must remain in the HDHP until at least the testing period ends. If you do not remain eligible (for example, you switch to a non-HDHP), you will need to include the money carried over as income when you file your taxes. In addition, a 10% fine will be imposed on the amount.

You can only transfer funds from an IRA to an HSA once in your lifetime. The maximum amount you can rollover is equal to your annual HSA contribution limit for that year.

The limits for 2024 and 2025 are as follows:

• $4,150 ($4,300 for 2025) for individuals, plus an additional $1,000 contribution if you are 55 or older.
• $8,300 ($8,550 for 2025) for family coverage with the same $1,000 additional premium.

Keep in mind that HSAs and IRAs are separate accounts. There is no such thing as a joint IRA or joint HSA. This means you and your spouse can transfer funds from your respective IRAs to your own HSAs, but not to each other’s HSAs if you’re married. But you can cover each other’s and other family members’ medical expenses from any account.

Rollover from other accounts

Traditional IRAs

You can roll over with traditional or Roth IRA in HSA. However, it is more profitable to roll with traditional IRA as this account offers you more benefits. This is due to the fact that withdrawal of contributions from Roth IRA are no longer subject to taxes or penalties at any time, and you can withdraw earnings tax-free after age 59½.

Converting from a traditional IRA to an HSA allows you to immediately load your HSA to pay for medical expenses tax-free basis. Any non-deductible IRA contributions you make are not rolloverable, so they will remain in your IRA. Because withdrawals from an HSA are tax-free when used for certain medical expenses, you’ll receive a tax benefit compared to a traditional IRA, under which you’ll pay income taxes on the funds withdrawn.

401(k) and 457 plans

You can also fund your HSA by transferring money from other types of retirement accounts, such as 401(k) or 457 plan. To transfer funds from other retirement accounts, you must first transfer those funds to an IRA. Once the funds are in the IRA, you can make a one-time, tax-free transfer to your HSA. This type of move is difficult and should be done with the help of a professional. financial consultant.

Other HSA Funding Methods

If you can afford to contribute to both your HSA and traditional IRA, you will reduce your adjusted gross income (AGI) and reduce taxes. And your IRA will continue to grow into retirement.

If money is tight and you’re age 59.5 or older, you can make regular withdrawals from your IRA and use it to contribute to your HSA. The tax benefits from a traditional IRA withdrawal and the tax deductions from HSA contributions should almost cancel each other out. And best of all, you can do this more than once—in fact, every year if you want.

Bottom line

Health savings accounts (HSAs) offer tax benefits because your contributions reduce your taxable income. An HSA can be used to pay for medical expenses, including copays and prescriptions. However, HSAs have limits on annual contributions, and to be eligible, you must be enrolled in a high-deductible health plan. You can also transfer funds from an IRA to an HSA. Please consult with a tax professional to determine whether an HSA or transferring your IRA to an HSA is the best financial decision for you.