As health insurance rates go up in response to full implementation of the “Affordable” Care Act, it becomes more important to take advantage of every tax break you have available. If at all possible you should maximize your HSA contribution, so that you shelter as much of your income from taxes as possible. But if you do not have the cash to fully fund your account, you should consider transferring money from your IRA to your HSA. That is because with an HSA you can use the money tax-free if you are spending it on a medical service, an advantage you don’t have with an IRA.
Funding Your HSA With An IRA
You can transfer Individual Retirement Account (IRA) money into your Health Savings Account (HSA), but this type of rollover is only permitted once. You can make this type of transfer from a traditional IRA, a Roth IRA, and certain SEP IRAs and SIMPLE IRAs. You won’t be able to do this from a SEP IRA or SIMPLE IRA that is an “ongoing” plan.
How Much Can You Transfer?
The maximum amount you can transfer is the maximum HSA contribution that’s set by the IRS annually. In 2013, you can contribute up to $3,250 for an individual HSA and up to $6,450 for a family HSA. Once you reach age 55, you can also make an additional catch-up contribution of $1,000 per year. Just make sure that the total contribution to your HSA from any source does not exceed the limit to avoid a penalty.
Once you enroll in Medicare, you won’t be allowed to contribute to your HSA. People used to sign up for Medicare right before they turned 65, and their benefits began the month of their 65th birthday. Now days, the average age of retirement is climbing. You can continue contributing to your HSA until you become a Medicare beneficiary.
How Long Do You Have To Keep Your HSA After A Rollover?
After you do a one-time rollover from your IRA to your HSA, you need to maintain HSA eligibility for 12 months to avoid a penalty. If you were to be covered by another health plan during the year after this transfer, or lose HSA eligibility for another reason, you could receive a 10-percent penalty.
Is The Transfer Tax Deductible?
Transferring money from your IRA to your HSA is a direct transfer, so you won’t have access to the funds. They will go straight from your IRA custodian to your HSA custodian. And, you are not permitted to deduct this HSA contribution from your taxable income.
If you really want to save on taxes, keep the IRA and fund the HSA using another source so you can subtract it from your taxable income. But, if that’s not an option, being able to use HSA money for out-of-pocket health care expenses may be worth it. You cannot access your IRA money until you turn 59 ½ without getting a penalty unless you qualify for a hardship withdrawal.
Wiley Long is President of HSA for America, and a passionate advocate for consumer-based solutions that will improve price transparency and lower health insurance and medical costs for people purchasing individual and family health insurance plans.