My love for health savings accounts (HSAs) is no secret. Aside from getting employer matching funds from 401K contributions, I believe that HSAs are the best type of retirement account to contribute to. HSAs offer tax-free contributions (and investment growth), while withdrawals for qualified medical expenses are also tax-free. And if you don’t use HSA funds for medical expenses, you can withdraw them in retirement – for any purpose – just as you can for an IRA, without penalty, starting at age 65.
So when I found out there is a little-known clause in the tax code that makes it possible to roll over Traditional IRA funds to an HSA (technically referred to as a “qualified HSA funding distribution”), I immediately decided to explore further.
What I discovered, I’ll share with you now. Let’s just say that my findings were “less than encouraging”.
You Only Get One Rollover in your Lifetime
For starters, you only get one IRA to HSA rollover in your lifetime. In other words: you better make it count. That is not troubling on its own, if it wasn’t for the fact that…
The Maximum IRA to HSA Rollover Equals the Maximum Annual Contribution
The maximum amount you can roll over from an IRA to an HSA is equal to the maximum HSA contribution in a given year. You read that right. In 2020, for example, the maximum amount you can contribute to an HSA is:
- Individual Plan: $3,550 (+ a $1,000 “catch-up” contribution if age 55+)
- Family Plan: $7,100 (+ a $1,000 “catch-up” contribution if age 55+)
To reiterate – these are the maximum amounts you can contribute to an HSA in a given year, but they are also the maximum amount you can roll over from an IRA to an HSA, in your lifetime!
If you were looking for an HSA windfall (as I was when I heard of this possibility), this is not it.
If You’re Eligible to Contribute to an HSA, you’re Missing Out on Contribution Deductions
It gets worse.
You have to be HSA-eligible, meaning you have to have an HSA-eligible high deductible health plan (HDHP), in order to complete a qualified IRA to HSA rollover in a given year. And if you complete a rollover of funds from your IRA to your HSA, you are limiting the amount of new pre-tax deductions you can take for HSA contributions from any other source, as the rollover is not in addition to the annual maximum contribution.
Missed new deductible contributions = higher taxable income = more taxes due.
You Must Remain HDHP/HSA Eligible for 12 Months After the Rollover
Regarding eligibility, IRA to HSA rollovers include a “testing period” requirement. This means that you must remain eligible for your HSA and HDHP for 12 months following the transfer.
You CAN Roll Over Funds from a Roth IRA, but you Would Not Want to
Technically, you can complete a rollover from both Traditional IRA’s and Roth IRA’s to an HSA. But a rollover from a Roth IRA would be far less beneficial, as you have already paid taxes on your Roth IRA contributions. This means that the subsequent qualified medical HSA expense withdrawals would have no net benefit.
Most will Not Benefit from an HSA to IRA Rollover
The only time I can think an IRA to HSA rollover would be beneficial would be this very limited scenario:
- You are HSA-eligible in a given year.
- You remain eligible for at least 12 months after making the rollover.
- The rollover funds come from a Traditional IRA and not a Roth IRA.
- You want to access the HSA funds right away for HSA-qualified expense withdrawals.
- There is no other way possible to increase your HSA contributions for that given year from any other funding source (and keep in mind, you can contribute to an HSA outside of an employer payroll deduction).
For more info on the IRA to HSA qualified funding distribution tax rules, see IRS Publication 969, Health Savings Accounts.
But, for the large majority of readers, you might as well just forget about it.