IRA Rollover to HSA

You are allowed a one-time transfer of money from an individual retirement account (IRA) into a health savings account (HSA). While people may call this a “rollover,” it technically isn’t. Instead, the Internal Revenue Service — and federal tax law — consider this a transfer.

Transfers are not taxable as IRA distributions and the amount you transfer to your HSA is not tax deductible.

The one-time transfer must be within contribution limits to a health savings account for the year you make the transfer. And you must be eligible for an HSA when you make the transfer.

Moving money from an IRA to an HSA can be complicated and costly if you do it incorrectly. Some plan administrators recommend talking to a financial professional before making any transfers or rollovers.

The first rule to remember is that you can only make an IRA to HSA transfer once in a lifetime. And before you can make an IRA to HSA transfer, you must be eligible to contribute to a high deductible health plan — or HDHP. You do not qualify for an HSA unless you have an HDHP first.

You must also remain eligible for your HDHP for at least 12 months after the transfer. This is called a “testing period.” If you switch to a non-HDHP plan during the testing period, you’ll have to report the transfer as income — and pay income taxes on it. You’ll also have to pay a penalty equal to 10% of the money you transferred.

You are limited in how much you can transfer into an HSA. Any transfer is counted as part of your annual contribution limit for an HSA. They are subject to change from year to year.

There are also limits on minimum deductibles and maximum out-of-pocket limits for qualifying plans.

You should contact your health savings account plan administrator to find out how to make an IRA to HSA transfer in your particular situation.

You must meet the requirements for HSA eligibility, make a contribution within limits and follow other rules set by the IRS.

Remember that you can only make one such transfer in your lifetime. IRA to HSA transfers can be complicated, so you should speak with a financial professional before making this type of transfer to make sure you won’t face costly tax consequences or stiff financial penalties.

Putting more money into an HSA can yield significant tax advantages, but an IRA to HSA transfer is limited to one per lifetime and making such a transfer can expose you to unnecessary taxes and penalties.

You cannot transfer money from a 401(k), 403(b), 457 or other types of retirement plans directly into an HSA. But there are ways you can use money from those accounts to accomplish the same goals.

There may also be other alternatives to fund your HSA that you should consider.