Q: I was talking to a friend the other day. She told me I am allowed to rollover some of my IRA to my Health Savings Account. Is this really allowed? Please explain.
A: Your friend is absolutely right. But, as is the case with most things in the world of money and taxes, there are some key things to understand and a few rules to follow.
If you are eligible, once in your lifetime you are allowed to do a rollover of part of your IRA into a Health Savings Account, most often referred to as an HSA. Note the three phrases, if you are eligible, once in your lifetime and part of your IRA.
To be able to do an IRA-to-HSA rollover, you have to be enrolled in an HSA-eligible health plan during that tax year. HSA-eligible plans are also referred to as high-deductible health plans. To prevent wasting your time, be sure to investigate your health plan first to see if you can even consider a rollover.
If you do qualify, make sure you’re pretty confident you’ll be enrolled in an HSA-eligible health plan for a full 12 months following the date of your IRA-to-HSA rollover. If you fail this one-year eligibility test, you’ll end up having to pay income tax on the IRA distribution. Adding insult to injury, if this happens and you are under age 59.5, you’ll even have to pay a 10% tax penalty for taking an early withdrawal.
Now, once in your lifetime you are only allowed to rollover up to the maximum HSA contribution amount for the year. In 2023, a single person can contribute up to $3,850 to an HSA and a married couple can contribute up to $7,750. If you are over age 55, you can tack on another $1,000. And, if you want to rollover the maximum amount allowed, just know that any other contributions made to your HSA during that same year need to be factored in. Please note, if you are married, you and your spouse can each do an IRA-to-HSA rollover.
Why is this IRA-to-HSA move such a good thing? Well, given that your IRA is most likely funded with pre-tax money, eventually you’ll have to pay income taxes on your IRA money. That was the trade you made when you took the tax deduction on your taxes. With this one-time, limited size IRA-to-HSA move, you are able to transform money that enjoyed a tax break into money that will never be taxed. Of course, that’s only true if you end up having health care expenses. No worries, that’s a bet I’m sure we all can make!
Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at [email protected] and at www.FrontStreet.com