A reader asked me about the once-in-a-lifetime transfer from an IRA to an HSA, officially known as the qualified HSA funding distribution. It’s one of those things that just because you can doesn’t mean you should. In all likelihood you are better off not knowing this option even exists.
Still Must Qualify For HSA Contribution
In order to do the once-in-a-lifetime transfer from an IRA to an HSA, you still have to qualify for making a contribution to the HSA. That means having an HSA-eligible high deductible health plan with no other coverage.
Eat Into HSA Contribution Limit
The once-in-a-lifetime transfer from an IRA to an HSA does not increase your HSA contribution limit. The maximum you can transfer is your normal HSA contribution limit. It’s not on top of your normal contribution limit. If you do the transfer, it reduces dollar-for-dollar the amount you can contribute in other ways, either directly or through your employer.
No Tax Deduction
The transfer from your IRA to your HSA is not taxable, but you also lose the tax deduction you otherwise would get if you contribute normally. As a result, compared to just contributing normally, doing the transfer raises your AGI in the same way as taking a withdrawal from your traditional IRA except you don’t have to pay a penalty if you are under 59-1/2. Raising your AGI increases your taxes. It can make you lose other tax benefits.
Gotcha Testing Period
If you do the transfer you must also commit to staying with an HSA-eligible high deductible health plan with no other coverage for 12 months. If you fail the commitment, the transfer becomes taxable and you’d have to pay a 10% penalty. There’s no such requirement if you contribute normally unless you invoke the last-month rule in order to contribute more than you are allowed otherwise.
Once In A Lifetime
With so many restrictions the transfer is still limited to just once in a lifetime, of a few thousand dollars.
I really don’t know what the point is in pulling money from one account to another, raising your AGI, paying more taxes and putting yourself into a gotcha trap. The once-in-a-lifetime restriction makes it sound like an opportunity you shouldn’t miss. Actually it’s practically useless.
If you have other money you can use to make a contribution to your HSA, just use your other money. You lower your AGI and you reduce your taxes. Your IRA will continue to grow for your retirement.
If you absolutely have no other money to fund your HSA but you are already 59-1/2, you can just take a regular IRA withdrawal and simultaneously contribute to your HSA. The income on the IRA withdrawal and the tax deduction for the HSA contribution will create a wash. You can do it every year if you want to and there is no 12-month commitment.
If have no other money to fund your HSA and you are not yet 59-1/2, compared to just taking a regular IRA withdrawal to fund the HSA, doing the transfer from your IRA to your HSA amounts to a penalty-free, but not tax-free, withdrawal of a few thousand dollars from your IRA. The penalty relief is limited to just once in your lifetime, and it comes with gotcha strings attached. It’s not that useful. You are better off letting your IRA grow undisturbed.
In summary, doing the once-in-a-lifetime transfer from an IRA to an HSA is:
- better than withdrawing from the IRA but not contributing to the HSA (why would you not contribute?)
- better than paying a penalty to withdraw from the IRA when you are under 59-1/2 to contribute to the HSA (just use other money to contribute and leave your IRA alone)
- worse than doing a regular withdrawal from the IRA to contribute to the HSA (limited to once-in-a-lifetime, have testing period)
- worse than using money outside the IRA to contribute to the HSA (higher taxes; less health insurance subsidy)
Bottom line: forget about the one-time transfer from your IRA to your HSA.
Say No To Management Fees
If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.
Mrs. Picky Pincher says
I guess I was better off, because I didn’t even know you could do this. I can’t really see why you’d want to, but I guess it’s good that the option exists?
I agree; I think it would just be best to contribute the money you WERE going to apply to your IRA into your HSA. You can always front-load your HSA at the beginning of the year and contribute to your IRA for the rest of the year.
Sam S says
Good point, Harry. Just because u can, doesn’t mean u should.
jim says
This whole idea sounds like a waste to be honest. Maybe I’m missing something. Interesting to know it exists.
Steve says
I was aware of the option and looked into it, just to find out how useless it was. I can imagine a scenario where it would have been great, but they put so many restrictions on it, I wonder why they even bothered.
Charles says
Its not useless. There are very specific scenarios where it becomes advantageous. In my case, I’d been laid off and then diagnosed with Leukemia which meant I was going to be unable to work for up to two years. Being able to use the IRA to HSA transfer allowed me to access that chunk of money to help pay my medical bills and, because I was on COBRA, my insurance premiums.
This once in a lifetime option gave me access to those funds without the tax implications of initiating an early hardship withdrawal from my IRA. It also left my IRA more intact than the hardship withdrawal.
Harry Sit says
We are looking at a scenario when you were under 59-1/2, with absolutely no other money outside the IRA.
– No income or income not enough to cover expenses
– No emergency fund savings
– No assets or investments to sell
How were you able to cover other expenses? Doing a one-time penalty-free withdrawal of a few thousand dollars still wouldn’t solve the problem of covering other expenses.
Tim A says
Everything else I read states there is no tax or penalty owed with this transfer and it does not add to your AGI since the amount is entered on line 15a of the 1040 and NOT on line 15b. Please explain where I am wrong.
Harry Sit says
Because you don’t have the deduction for contributing to your HSA, your AGI is higher than it otherwise would be. In effect the IRA withdrawal is taxed.
Andy H says
Harry,
Saying that your AGI goes up assumes that you were going to fully fund the HSA otherwise. Also, if you choose to do this you are probably looking to free up some cash AND fully fund the HSA at the same time.
Harry Sit says
Andy – When you consider doing the IRA-to-HSA transfer, you must want some money in the HSA. Your natural alternative is simply funding it on your own with money outside the IRA.
Charles says
The only possible use I can think of is if you already had medical expenses since Hsa was established.
And as an early retiree
Had No funds to fund HSA, and wanted to make a relatively small non-qualified ira withdrawal, that would count as a qualified hsa distribution.
Other than this it’s completely useless.
Tim A says
It allows a tax free/penalty rollover from an IRA prior to age 59.5 which does not add to AGI which may help avoid other taxes by keeping AGI below a certain level and would help reduce RMD from that IRA at a later date.
Harry Sit says
Example: Suppose your AGI is $50,000 before any HSA contributions. If you contribute $3,000 to your HSA out of your income or savings, you get a $3,000 deduction. Now your AGI is $47,000. If you do the one-time transfer from your IRA, you AGI stays at $50,000. Doing the one-time IRA-to-HSA transfer versus simply a normal contribution actually raises your AGI from $47,000 to $50,000.
Tim A says
I am talking about a 401K withdraw then HSA contribution versus an IRA to HSA direct rollover. Of course if you use money from a savings account then you lower your AGI but you have done nothing to help get other money out tax free to help long term as far as forced RMD’s later.
Harry Sit says
I don’t know who in their right mind would do a 401k withdrawal before 59-1/2 in order to fund the HSA. When you raise your AGI (or fail to lower it), you are not getting the money out tax free. If you are willing to pay tax in order to lower future RMD, you might as well do Roth conversion. When you do Roth conversion you don’t have any limit in frequency or the dollar amount.
Tim A says
I wouldn’t do a 401k withdraw just to fund my HSA. I would and will do a direct rollover from my IRA to my HSA to withdraw money before age 59.5 tax free. There is a reason they only allow it once. If they allowed it more then I would do it all the way to age 59.5. I will withdraw from my 401k just to avoid paying a higher tax rate later with forced RMD’s but keep my income low enough to be in a lower bracket and keep my qualified dividends tax free. I will start withdrawing from my IRA for the same reason and in the same manner after age 59.5 Would I not have to pay taxes now
on any Roth conversion?
Harry Sit says
You keep saying it’s tax free. It’s not true. Losing a deduction is the same as paying tax on the withdrawal. Doing a Roth conversion is just as effective without the strings attached and it gets you to the same place.
Tim A says
I agree with you for people who are still working or have substantial investment income still. I have been doing just that through my employer as far as contributing to my HSA. However, soon I will be retired with very little taxable income other than withdraws from my IRA and 401k which I have contributed to greatly over recent years so I am sure you would not suggest spending my savings account money down to zero FIRST and having virtually no income and then being forced to withdraw large chunks of 401k/IRA at age 70.5 that place me in a higher tax bracket. I am suggesting that there are cases where this odd one time opportunity may well help a little even if it is a very minor amount since you are limited to the one year contribution limit of the HSA.
Tim A says
It is one of the few ways to make a tax free/ penalty free withdraw from my IRA before age 59.5. Charles above actually referred somewhat to my case as far as an early retiree but I do have other funds I could use to further fund my HSA. In my case the deduction does not do much for me because I plan on staying in a very low tax bracket anyway and reducing RMD’s is a financial strategy for tax savings. I did misspeak earlier about AGI. I meant this direct rollover does not add to “total income” while a 401k withdraw does but that may be irrelevant anyway.
Rick says
It’s an odd circumstance but in my situation I’m 62 , on cobra for another year and on hdhp. In order to create income reduction to qualify for my wife’s health subsidy.by transferring to hsa I can make premium payments out of hsa. I can add up to an equal to 4400 for the year. I save taxes on the transfer amount is the advantage I see.
Harry Sit says
If you are talking about transferring from a traditional IRA to HSA, it does not create income reduction to qualify for health subsidy. Money moves from your IRA to your HSA. Your income doesn’t change. Instead, if you contribute to your HSA normally, without this special dance of once-a-lifetime transfer from IRA, you do create income reduction to qualify for health subsidy. That’s another reason to forget about the one-time transfer from IRA to HSA.
Anna says
I also agree that there are instances where the one-time transfer from traditional IRA to HSA may make sense. My spouse and I are 55 and 62 years old respectively. We are now retired with no earned income (thus cannot make HSA contributions from paychecks). We cannot qualify for the healthcare subsidy. For the next couple of years we are living off of savings and a small pension. Obviously we are not medicare eligible yet, and we are facing enormous healthcare premiums, even for the HDHP we’ve chosen for 2018. We have significant funds in traditional 401k/IRA accounts, and this is the only way I know of to get some of that $$ out tax-free and penalty free. I can’t take funds from mine penalty-free now anyway since I am not 59.5 years old yet. Please comment if I’m missing something here!
Harry Sit says
Take money out from your husband’s IRA. It’s taxable but you get a deduction for contributing to the HSA. The income and the deduction washes out each other. That makes it tax free. There is no penalty because he’s over 59-1/2. That makes it tax free penalty free. You can do it every year instead of just once in a lifetime. You don’t have the potential of failing the test in the following 12 months.
Alternatively, just contribute to the HSA from your savings and a small pension. You get a tax deduction which lowers your income and your taxes. If you plan it well you can even qualify for the healthcare subsidy which saves you thousands of dollars a year.
Tim A says
You aren’t missing anything and it is a viable tax strategy for my situation. You may be different if marriage changes the way your IRA distributions will work in the future.
Rick says
By taking.my one time transfer this year I’m able to pay my health care premiums for next year due to being on cobra and my wife is able to severely reduce her premium by both of us now falling under the $64,950 limit put on income limits. We both are on ss and i collect on my ira , so not having to pay taxes on even 4000 $ means alot. This gets my wife to Medicare and saves us about 8 grand in premiums .
Harry Sit says
You are able to do exactly the same by simply withdrawing the money from the IRA followed by a normal contribution to the HSA. If you use money outside the IRA to contribute to the HSA, you will pay lower taxes and she will get even more subsidy on her health insurance. By doing the transfer you are paying more taxes and receiving less subsidy. A double whammy.
Rick says
I guess I don’t understand. I’m led to believe the transfer is not taxable but an ordinary withdrawal would be.
Harry Sit says
You get a deduction when you contribute to the HSA, which washes out the taxable income from the ordinary withdrawal. Or you can keep the deduction when you don’t do the IRA withdrawal but use money outside the IRA to contribute to the HSA. Keeping the deduction lowers your taxes and increases your health insurance subsidy.
Tim A says
Whether it works for you is very personal and specific. Some say leave the money in the IRA so the investment can continue to grow but that assumes it grows and in my case I can invest my HSA money so it can grow as well. It depends on your current tax bracket versus possible future tax bracket based on required minimum distributions. If you are 55 to 59.5 and retired and can stay in a low tax bracket now and it looks like you will be in a higher tax bracket when you are forced to take RMD’s then it may well help you to do the direct rollover now but it will not be a huge savings and you do have to worry about “passing the test” but that is just a matter of not making stupid changes for a year or so. As far as the subsidy, I am using COBRA this year so it does not come into play for me.
Harry Sit says
Tim – In your specific case it’s still better to do a Roth IRA conversion than doing this IRA-to-HSA transfer.
Suppose your income is $30k before you do anything. You are in a low tax bracket. It looks like your tax bracket will be higher when you have RMD after 70-1/2. So you transfer $4,000 from your IRA to your HSA. Your income after the transfer is still $30k. You remove $4,000 from your IRA, which lowers your future RMD. The $4,000 in your HSA can grow. You can use it for your future medical expenses. All great.
Suppose instead of doing the IRA-to-HSA transfer, you now convert $4,000 to Roth and you use $4,000 from money outside your IRA to contribute to your HSA. The income from the $4,000 Roth conversion and the $4,000 HSA deduction wash out. Your income is still $30k. You still removed $4,000 from your traditional IRA, which helps lower your RMD. Your HSA still has $4,000, just like before. The difference is now you have $4,000 in your Roth IRA, which grows tax free, instead of staying outside, which can get taxed when it grows. You can also do the Roth IRA conversion every year instead of just once in a lifetime. It removes more money from your traditional IRA and helps lower your RMD in the future.
Rick says
I agree totally. This is specific for me. This special rule allows me to make premium payments while on cobra and pass the test . I’m on cobra for another 14 mos with no plans to change. Since my earlier contributions equalled 780$ I can only transfer the balance equal to 4400$. Long story short, I’m saving tax on 3620 $ coming out of my ira.not a lot of savings but still. And doing it this year saves on the income for next. It’s a race to Medicare at this point any way I can. This is the screwed up health care we are in.
Tim A says
Harry’s point should still be well taken. If you are going to be in a fairly high tax bracket currently and it will not be higher when you turn 71 then using other money [ if available of course ] would probably be your best bet because you get the deduction. I do not disagree with his point. I just have a very specific situation and long term plan and believe this may help me just to a very small degree. If I am even wrong about that then I would appreciate being straightened out but it makes sense to me if everything goes as planned. I will easily pass the test and as long as I have no serious health issues I will eventually be forced to take large RMD’s in the future partly because I intend to avoid taxes as much as possible over the next several years. Without these specifics being the same, you are probably better off with Harry’s suggestion. This is a great site, BTW.
Rick says
Harry, you make sense but one more question. If I do the transfer,can I then after passing this test , once a year make a withdrawal and still contribute to hsa?
Harry Sit says
Withdrawals are unrelated to contributions, whether by a transfer or from money outside an IRA. You can always withdraw as long as you have eligible medical expenses.
Tim A says
Harry, I somehow missed your Roth conversion suggestion before my latest posts. That certainly seems to accomplish my goals so I will probably go that route. Thank you very much for putting up with me and the follow up.
Anna says
Harry / Tim / Rick,
I’ve just now caught up with the comments after my initial question, and I appreciate the feedback. The discussion caused me to look over IRS form 8889 and instructions. The last time we had an HDHP was ages ago when we were working, so I didn’t realize that we could contribute to an HSA outside of a paycheck (using cash on hand or IRA distribution), and subsequently deduct that amount. Wonderful!
We can’t qualify for a subsidy, period …. so I’m not even entertaining that.
However, I’m still thinking about the QHFD as a (pre 59.5 years old) tax-free, penalty-free way to move money from my traditional IRA to my HSA. Questions:
– I believe that if I transferred the $$ in January 2018, then my “testing period” would be January 1, 2018 through January 31, 2019. Is this correct? This would mean we must be on a HDHP again in 2019 to avoid tax/penalty on the 2018 QHFD.
– From reading an older 2015 FinanceBuff article on HSA’s, it sounded like BOTH my husband and I could contribute an extra $1000 to our respective HSAs, since we are both over 55. Is this still true? If so, then I might take $7900 (the 2018 family amount of $6900 plus the extra over-55 allowance of $1000 for me) for the QHFD into my HSA, and then have my husband contribute $1000 into his HSA, for a grand total of $8900 contributed to our HSAs in 2018.
For future years, we would just contribute to the HSAs from our pension funds or from IRA distributions, depending on what our cash flow and tax situation looks like per year. I don’t see a reason for my husband to do a QHFD, as he is already 62 and can already take IRA distributions without penalty.
We’re also looking at a couple of other strategies:
1) Depending on whether the tax changes allow deductions for medical expenses, If we can afford it, we may go that route for the next couple of years, and save our accumulated HSA funds for later years. Even with the 10% over AGI rule, we still may be able to deduct given our high expenses and if I can keep our AGI as low as I anticipate for 2018-2019.
2) After the next couple of years, slowly convert 401K/IRA $$ every year over to our Roth accounts, so that the RMDs will be less in future years.
3) While doing the above, we need to manage the conversion amounts carefully so that we stay below a MAGI of $170K for married couples (the current line at which the Medicare high income premium surcharge kicks in). This $170K line might change with new tax brackets … so tough to plan right now.
I figure that doing the above will save us in Medicare premiums for a few years at least. Once we both hit 70.5, the RMDs will most like cause us to pay the higher surcharge for our remaining golden years (even though we’ll have done some traditional to roth conversions prior to the RMDs).
Harry Sit says
Because you lose the deduction when you do the transfer, before 59-1/2 it’s penalty free but not tax free. Because your husband is already over 59-1/2, penalty-free is of no value to you. He can just do a normal withdrawal from his IRA and you can use the money to contribute to the HSA. If you have enough money outside IRAs, you can just contribute out of pocket. The deduction will lower your taxes. If your AGI is low and you don’t care about the deduction, you are better off doing Roth conversion. Either way, the transfer has no advantage over alternatives.
frank says
This discussion is right in my eyeballs.
As an early retiree (>59.5 years) I just enrolled my wife and I in our first HSA medical plan for 2018.
Now I have to fund it.
I am funding 2018 life from IRA funds ($122,000 budget withdraw for 2018) .
If I follow, simply withdrawing funds from the IRA and simultaneously funding the HSA for the same amount, creates a tax wash on the distribution. Therefore, no advantage to hassling with the QHFD. Do I miss something?
If I do decide to do a retirement gig during 2018 for a few bucks, does that change the analysis?
Thanks!
Harry Sit says
You are not missing anything. Once you are over 59-1/2 there is no advantage in QHFD over a regular IRA withdrawal and normal HSA contribution. It doesn’t change anything whether you have employment income or not. In a normal HSA contribution you have the option to use money outside your IRA and take a deduction on your taxes.
Jeff says
– The Key to this is that if you can contribute to an HSA with savings after retirement and before Medicare, you have a nice tax deduction. This is the only retirement account that does not require Earned Income as its source of funding the contribution.
– I can see where this one time funding may make sense for people without savings (other than their Pre Tax Trad IRA) as it is a tax free conversion from the IRA to an account that has the benefits of a Roth (tax free growth, tax free withdrawal (for med ex), and no RMD.)
An HSA should be part of everyone’s retirement plan!
John says
I am retired. When it is time to make my RMD’s at 70-1/2 years old, my taxable income will be higher than it was when I was working. I am trying to reduce my future RMD’s now by transferring some of my individual IRA to a ROTH IRA. I transfer just enough to keep me under the 25% tax bracket. Wouldn’t it be an advantage to me to use a IRA to HSA tax free transfer?
Harry Sit says
It’s not an advantage over normal Roth conversion and normal HSA contribution using money outside an IRA. See last reply in comment 16.
joe shaw says
My adviser gave me bad advice. He suggested doing a one time IRA to HSA transfer. I have no earned income this year, so I am not able to contribute to my HSA. So an IRA transfer sounded good. I read about the gotcha: HSA-eligible high deductible health plan with no other coverage for 12 months is required to make the transfer. I decided to do it anyway since I have high deductible plan this year. I made the transfer in January, but now I’m losing the plan in August, and so all the transfer is now going to be taxable. Is there a way to reverse this mistake?
Dave R says
Almost all of these analyses ignore the fact that you will be able to pay medical expenses out of your HSA tax free later in retirement. If you make withdrawals from an IRA to pay a medical bill, it will be taxed and you will not be able to deduct the expenses until they exceed the 10% AGI threshold, and not even then if you are unable to itemize deductions. There is some benefit to a transfer, albeit long term.
Harry Sit says
If you just fund the HSA normally, with money outside the IRA, you will also be able to pay medical expenses out of your HSA tax free later in retirement. The transfer has no advantage there. It only makes you lose the tax deduction and in effect makes the IRA withdrawal taxable right now.
Penny Brown says
I have just happened upon this site and have a question for someone out there. I am 59 3/4 yrs old and have a HDHP thru my employer and an FSA. I wish I had set up the HSA instead – but am hearing conflicting feedback as to if I can fund a HSA separately thru my credit union etc.
My husband is 60 and is not employed ; He is on my insurance plan thru my employer.
I plan to go part time in 2019 and wish I had set up the HSA to help with medical bills that seem to pile up. We also currently pay for LTC insurance premiums with post-tax dollars. Next year , we will be paying for health insurance premiums with post tax dollars as well. I will receive a small pay out of around 35k in ESOP money next yr .Should I roll that into an HSA at that point? Is the amount limited as to what I can roll? Can I set an HSA up now independently from my employer and contribute this yr even though I already contribute to the FSA?
Harry Sit says
If the FSA is a general purpose FSA (not limited to dental and vision, not limited to reimbursing only after you meet the deductible), you can’t fund an HSA in the same year. You can contribute to an HSA for 2019 if you still have an HSA-eligible HDHP in 2019 and you don’t have the FSA (be careful if any FSA money rolls over). Because you are already over 59-1/2, the fancy IRA-to-HSA transfer doesn’t really help you.
Carl says
Useless? Wow.
Did it ever occur to you that if this is done early on in ones career, a $6,900 rollover (HDHP for a family HSA @ max contribution) will not require a minimum distribution is required at 70.5 years of age? This provides more planning flexibility in retirement.
There are also positive asset location implications as well.
Last, the present value of the future tax benefit could be substantial – so you are missing the impact of the tax benefit compounding over the years.
Harry Sit says
At the same time, by giving up the tax deduction now, the foregone tax benefit also compounds over the years, more so than simply reducing the RMD.
Carl says
Anyone who thinks tax rates will stay this low has been living in a cave. Between our debt, entitlements and demographics, one can argue tax rates will likely rise. So the present value of a higher tax on the future account value in retirement should also be considered.
Harry Sit says
See reply to Tim under comment #16. Converting to Roth + contributing to HSA normally dominates IRA-to-HSA transfer.
cw says
So I’m going to be starting a new job in September and will be eligible for benefits in October. Three months will not be enough time for me to contribute the max single amount ($3,450) to the HSA before the end of the year. I could probably contribute $750 max + the $500 match from my employer for a total of $1250. But I was thinking that I can use funds from my IRA to do the one time transfer to the HSA for the difference of my estimated paycheck/employer contribution ($3450-1250=2200). Then starting in January 2019, I’ll have the whole year to do regular contributions to my HSA up to the full amount. Does this seem like a good idea?
Brenda Horton says
I was researching the question regarding: Can we make an IRA Distribution to fund our HSA account. Both my husband and I are retired and are on SS and Medicare so we do not have a high deductible health plan but plan to use the HSA funds for dental services and work needed and we have no dental plan so that makes it a very high deductible plan. Would this qualify under that one time transfer usage rule? I would appreciate any clarification. Thank you.
Harry Sit says
It doesn’t qualify.
Andy says
The one situation where it might be advantageous is when you switch to an HDHP and open an HSA late in the year. The HSA deduction is adjusted by the number of months you had the HDHP, whereas the one-time transfer can be made for the full year maximum deduction. However, the one-time transfer will use up the deduction for the year and no additional contribution can be made for the remaining months in the year without a tax consequence. So a trade off between using pre-tax dollars for medical expenses versus giving up a tax deduction by foregoing the HSA cash contribution for those remaining months. In my case, the HDHP will be effective November 1, allowing only two months tax deductible contributions to the HSA versus transferring the full annual amount from the IRA. Any thoughts on that?
Carl says
This sounds v logical – if it’s later in the year, your analysis seems to make sense.
Harry Sit says
If you are reasonably confident you will be in the HDHP from January to December of the following year, the “last-month rule” allows you to contribute to the full annual limit even if you started the HDHP late in the year.
David says
I am considering switching from a Cadillac HMO plan to a HDHP starting in January through my employer. I’m in my 30’s and have high monthly expenses for childcare etc… my concern is that if I have a medical emergency in January I won’t have enough HSA funds to pay the $4k out of pocket yearly max to cover the bill. I have money in my IRA that I could use to front load the HSA for a portion of the annual contribution and structure monthly contributions to hit the max by EOY. I’m not too worried about losing the tax deferred growth in the IRA because I will likely have more tax deferred money than I will need in retirement thanks to some amazing benefits from my employer.
Harry Sit says
You don’t have to cover the bill only with money from the HSA. You can pay with other money (emergency fund in a savings account) and request reimbursement from the HSA at a later time when you finally have enough balance in it.
Alan Proctor says
Ok I must admit i am confused. I am 67 and on Medicare. However, my wife (who has retired) and just recently turned 59 is on a High Deductible health care plan. The only income we have is SS, a very small annuity and our savings. My wife’s health plan premiums are contingent on our combined income. She had an HSA from her previous employer and will run out of money (we have used it to pay her deductible and various RX’s) sometime in 2019. My understanding of this one time transfer is it would not be reported as income, thereby not increasing her health plan premium. My line of thought was why not make this transfer as we would avoid paying any Federal Tax on these dollars. But now after reading most of all the responses, should we wait until she is 59 and 1/2 (2019) or can we still do it this year? What am I missing? We pay no Federal income taxes with our current situation so do not need the HSA deduction.
Alan Proctor says
So why no response Harry on my above post?
Harry Sit says
Sorry I missed it. Although it’s true the one-time transfer would not be reported as income, thereby not increasing her health plan premium, if she contributes to the HSA with money from your other income or savings, the HSA deduction will lower your income and decrease her health plan premium (increase the ACA subsidy she receives).
Harry Sit says
P.S. Also, if you withdraw from your IRA, because you are already over 59-1/2, and you give the money to her and she contributes it to the HSA, the income from the IRA withdrawal and the HSA deduction will offset each other. It still doesn’t increase your income or her health insurance premium. It achieves the same thing without the once-in-lifetime limitation or the forward 12-month testing period commitment.
Alan Proctor says
Thank you very much for the responses. Must admit ,your point on taking dollars from savings and having a HSA deduction sounds good from standpoint of increasing the ACA subsidy sounds appealing. But are you certain the ACA subsidy is on AGI not Gross income? If on AGI you are correct but if not then this would not work.
My other question is my investment firm (Fidelity) said no 1099 would be issued if a transfer from her IRA to the HSA. But neither myself rf them know if we can do it as the transfer would be coming from a plan that once was a 401k and rolled over into what he termed as a rolled over IRA?
Harry Sit says
“The Marketplace uses an income number called modified adjusted gross income (MAGI) to determine eligibility for savings. It’s not a line on your tax return.
See what’s included in MAGI and how to estimate it.”
https://www.healthcare.gov/income-and-household-information/income/
MAGI starts with AGI and then adds some other items. Lowering AGI also lowers MAGI.
You can do the transfer from any pre-tax IRA owned by the same person who owns the HSA, but you are really better off not doing it.
John says
There’s no way to backdate the once in a lifetime contribution is there?
In early 2019 I’ll go on my wife’s HDHP. She’s worked there for years and will very likely continue to do so. I know you can backdate regular contributions through April 15th (ie contribute by 4/15/19 and count it for 2018). So after bonus are paid, we will max out her individual limit for 2018 and our family limit for 2019 (I was not on a HDHP in 2018). If done by April 15th, can I use my one-time roll over and backdate it to 2018?
I’ve read the IRS regs and they seem to be silent on this. I would be a qualified individual once I’m on her plan and you can typically backdate HSA contributions. Thoughts? Too clever by half? This is about the only way I can find to make this thing worth it.
Harry Sit says
Once you are on her plan, you become eligible only for 2019. Even though normal contribution can be “backdated” you specifically still can’t make the contribution for 2018 between January 1 and April 15, 2019, because you weren’t eligible in 2018. The IRA-to-HSA transfer depends on and uses up your normal eligibility. It doesn’t let you contribute more than you otherwise can.
A_DAB_will_do says
So, I’ve read the discussion here with great interest. From a purely tax advantage perspective, I understand and agree with the author’s analysis. Here is my take on the one time transfer, based on my own personal situation. My wife and I are in our late 40s. We have a daughter who is a freshman in college. We are aggressively saving in order to pay for her 4th year in school(we have enough savings for years 1-3). I’m considering a new job where the health insurance is a HDHP with HSA. I would be moving from a traditional PPO insurance benefit if I accept the new job. I am considering the IRA to HSA one time rollover for the peace of mind it would offer. Right now our medical expenses are largely covered by the PPO with modest out of pocket impact. the HD insurance will require that I potentially commit a large chunk of our college savings to paying for the $6000 deductible if someone in my family has a serious health incident.
My family is not wealthy enough to fund college, emergency fund incase my wife or I lose our jobs, AND deal with the high deductible in our new HDHP($6K/$12K annual max). There’s just not enough money in our budget to weather a perfect financial storm; if it hits. Yes, some readers might think to chastise me for failure to plan earlier in life. Trust me I’ve already inflicted enough stress on myself to last the rest of my lifetime. The issue at hand is what to do now with the life fate and my own choices have created.
Performing the rollover would allow me to tap retirement savings to cover a health emergency, by funding the HSA to pay the high deductible. All without wrecking our budget for our daughter’s college degree. If I can save enough money in the next 2.5 years, I don’t have to worry about co-signing college loans or taking out PLUS loans for college costs.
Ignoring the hard math, there is a peace of mind factor to having the high deductible paid if I need it. IMO, life is not always strictly a numbers game. My family is worried about the job change. I am too. If I can eliminate one source of worry it improves my quality of life in a manner that’s hard to quantify in dollars and cents.
What I take away from the discussion is this. Rather than make this once in a lifetime rollover from IRA to HSA on day-one of my new job, I follow a different plan. Instead I complete all the research necessary to perform the rollover. If a disaster happens, then I have my retirement advisor/accountant ready to rapidly perform the rollover. In the meantime, as long as nothing medically serious happens to my family, I make the normal payroll contributions and reap the tax benefits. But, if something catastrophic happens, I make a phone call and trigger the rollover to provide the maximum amount of funds available to the HSA to pay for the medical bills.
Now I sleep better because I know I have resources ready to deal with a medical emergency, still keep on budget to fund my daughter’s college career, our retirement, etc.; and reap as much tax benefit as possible from the HSA contributions.
Thanks to all the commenters and the author for the detailed and inciteful discussion. I hope my post helps someone else do what’s right for them with this IRA-HSA rollover gambit that the IRS makes available.
Carl says
First of all, you’ve saved enough for 3 years of her college – that’s pretty darn good! Most can’t say that. And congrats on the new job.
I think your plan makes sense. You should think about contributing to the new HSA via payroll deduction to the extent your budget permits right out of the gate. If you end up needing a big chunk you can always roll over the balance.
I don’t really see any downside to doing it all at once. It’s money you can tap and money you eventually will not need to pay taxes on in retirement when you withdrawal it. But as you say, you need to be comfortable with your choice.
One factor lost on a lot of people is the question around future tax rates. Our govt is going to need to pay the piper eventually, so I think it’s a safe bet to assume rates will be higher in the future. So an IRA to HSA qualified distribution is a nice hedge on higher future taxes.
Gary says
Of course, if you have a very high income and can afford to max out all your various contributions, then the transfer makes no sense. But all other things being equal, it’s usually better to have money in an HSA than in an IRA if you’re near retirement. Once you’re 65, an HSA is just like an IRA except that withdrawals for medical expenses are tax-free from an HSA, but taxable from an IRA. Tax-free is better than taxable. You can also withdraw money from an HSA for non-medical use and it’s treated exactly like an IRA withdrawal. The main drawback is if you need the money for non-medical reasons before you turn 65, there is a 20% penalty. But of course, it’s tax-free for medical reasons at ANY age.
If you’re unable to fully fund your HSA and have IRA funds you can roll over, that’s the way to go, unless you’ll need that few thousand to live on before you’re 65.
Harry Sit says
Because it’s only available once in a lifetime, you don’t need a very high income. If you are under 59-1/2, you only need to have a few thousand dollars outside your IRA to make the HSA contribution. If you are already 59-1/2, you don’t even need that. Just withdraw from your IRA normally and make the HSA contribution normally will do.
ChrisVan says
Tim, excellent discussion! Here’s a little added twist to your IRA-Roth conversion offset by an HSA contribution you outlined on Dec. 3, 2018 in your response to comment #16.
In your response you wrote “Suppose instead of doing the IRA-to-HSA transfer, you now convert $4,000 to Roth and you use $4,000 from money outside your IRA to contribute to your HSA. The income from the $4,000 Roth conversion and the $4,000 HSA deduction wash out.”
Here’s the added twist. Suppose I’m below the capital gains tax income threshold (0% bracket up to $78,750 for married joint filers in 2019). Suppose I use my long-term investment money as the source of the money “outside” my IRA to fund the HSA contribution. I then do an equal amount IRA to Roth conversion.
It seems that I’m funding my HSA contribution tax free (no tax on capital gains) and I’m using the HSA contribution deduction to effectively do an IRA to Roth conversion tax free.
Am I missing something here? Is there some income consequence (AGI, MAGI, etc.) I’m missing? Is there an impact on income-based ACA subsidy levels? Is there an impact on portion of Social Security income that’s taxable?
I welcome any feedback. Again, great discussion. Thanks.
Alex says
First of, this is the first and so far the only place where the following QHFD related fact is even mentioned: the QHFD is NOT all about gaining, but it’s also about losing (primarily on increased AGI due to lost payroll HSA deductions and, hence, increased taxes due). Harry addressed the latter pretty extensively – thanks!
Now, I however do still believe that under some very specific circumstances the QHRD might be advantageous. I thought that some might find the following link helpful: https://wealthyaccountant.com/2019/04/28/the-once-in-a-lifetime-ira-transfer-to-an-hsa/.
But YES overall – great discussion everyone!
TEM says
This is very interesting, however, I have the situation where I have so much in IRAs that my future RMDs will push me into much higher tax brackets. I am subject to the medicare surcharge on investment income. I am now 58 and want to reduce my IRA balances before 70. I am doing Roth conversions up to the top of my bracket. Roth conversions are ordinary income. Why wouldn’t it make sense for me to also convert (one-time) some IRA funds to HSA. If I instead fund my HSA with taxable account funds, that will generate investment gains which increase my medicare surcharge.
Carl Hall says
First, I love this ongoing discussion. I always look forward to updates on this thread as I’ve been working on an HSA start up. so I am a bit obsessed with HSAs.
TEM, my first reaction is “yes, you absolutely should do the one-time IRA to HSA distribution.”
You are — rightfully in my mind — already performing the Roth conversions. I think odds are good tax rates will be higher in the future: we are running a $1 Trillion deficit in a booming economy, which should scare any fiscally responsible individual.
In executing your IRA to HSA option you’d avoid Increasing taxable income like you are facing in the Roth conversions.
Also, you’d avoid future required minimum distributions in your HSA, thus giving you more flexibility.
Furthermore, it sounds like you’d also be wise to maximize future HSA contributions with after-tax funds so you can deduct it on your return to slightly reduce your tax burden triggered by IRA to Roth conversions.
Is your HSA tied to an individual or family plan? You are over 55 so you also benefit from the $1,000 catch-up provision.
I think one other consideration worth discussing for an affluent individual like youself is “how long do I ride this HSA train?” In other words, is there an optimal HSA size? I would argue “yes” because HSA accounts are treated as taxable income to an estate when you die, so having a $1 million HSA probably isn’t a good idea unless you know you will be facing massive out of pocket costs in retirement!
JP Morgan’s Guide to Retirement suggest out of pocket healthcare spending as a percentage of total expenditures is around 12%.
My personal rule of thumb on this is that your HSA account size should not surpass $350,000. This assumes a couple – for an individual it would be $175,000 This comes from a Fidelity study on the cost of healthcare in retirement and assumes a margin of safety relative to the estimated present value of future out-of-pocket spending.
Harry Sit says
Since you are already converting to Roth, just convert a little more and contribute to the HSA normally. The additional conversion and the tax deduction from the normal HSA contribution will offset each other. When you are paying medicare surcharge on investment income, you must have income such as dividends and interest that’s taxed anyway whether you reinvest or not. If you just reinvest a little less, you can use the money to fund the normal contribution.
TEM says
Harry…you are right, I do have some interest and dividends that are ordinary income. I can just use those to contribute to the HSA and the tax deduction there opens up equivalent space for more Roth conversion. Carl – thanks for your response as well, I agree that there is a cap on how much should be in HSA, my intent is just to use it to effectively make as much of my medical expenses as possible pretax, not to create another retirement account. Thanks all!
Mike S says
Regarding the 12 month test. After doing the once-in-a-lifetime rollover, if I ended a qualifying plan during that period, but then started another one shortly thereafter, would I be able to avoid the penalty and taxes by doing that?
Harry Sit says
How soon is shortly? You have to eligible for a qualifying plan on the 1st of every month in those 12 months. It doesn’t have be the same plan but you can’t leave a 1st of the month in the gap.
John says
What about transferring $8,100 (2020 family + catch up) from a non spouse inherited IRA that is requiring annual RMDs while the holder is younger than 59.5? Otherwise, that money will eventually be fully forced out of the IRA (sooner rather than later) and taxed as income.
Harry Sit says
Just taking the $8,100 from the inherited IRA and contributing to the HSA as usual will get you exactly the same result without having to perform a special dance.
A Landstander says
Early retirees (before age 55) who are aiming to stay on HSA compatible plans and who want to minimize any early withdrawal penalties from Traditional IRAs would benefit from a direct transfer from their IRA to the HSA. If you have no other income, but want to continue growing your HSA nest egg, and have a heavy allocation in the pre-tax bucket (many do), it seems like this option is a good fit. May also be able to do it twice if your spouse can open an HSA – I believe the once per lifetime limitation applies to each individual. So, $7,200 x 2 = $14,400 can get contributed to the HSA for improved tax treatment without incurring any early withdrawal penalties.
Scott says
Can someone please respond to Anna’s question in #20, paragraph 4 about the start and end dates for a IRA to HSA conversion “test period”? If a conversion is done in January, does that count as month one of twelve or does another HDHP plan need to be started the following year to meet the twelve month requirement?
John B says
Very late to this conversation. I’m over 59-1/2 and approaching retirement within a few years. I took advantage of the one-time transfer in 2024 to move $8000+ from my personal IRA to my HSA. I did this to boost my HSA funding and reduce the future tax impact of forced RMD’s. Contrary to the author’s assertion, my AGI in the year of the transfer did not go up–I simply increased my pre-tax 401k contribution with the money I would’ve contributed to my HSA. For me this was a no brainer, nothing but upside with this move.
Harry Sit says
You could’ve done the same by withdrawing from the IRA, funding the HSA, and increasing your pre-tax 401k contributions separately, year after year, without limiting yourself to a once-in-lifetime opportunity.
John B says
Harry, not sure your method achieves the same result. The withdrawal(s) from the IRA get taxed as ordinary income, no? And there would be no beneficial reduction of RMD taxes. I don’t see the once-in-lifetime transfer as “limiting” anything. One could implement your strategy plus the one-time transfer as long as all contribution limits are followed.
Harry Sit says
Person A: Transfer from the IRA to the HSA. Increase pre-tax 401k contributions. End result: No tax on the money coming out of the IRA, no tax deduction for the HSA contribution. AGI is reduced by the increase in pre-tax 401k contributions. IRA balance is lower, which reduces future RMD, but 401k balance is higher, which eventually will increase RMD.
Person B: Withdraw from the IRA. Contribute to the HSA. Increase pre-tax 401k contributions. End result: Taxed on the IRA withdrawal, negated by the tax deduction from the HSA contribution. AGI is reduced by the increase in pre-tax 401k contribution. IRA balance is lower, which reduces future RMD, but 401k balance is higher, which eventually will increase RMD.
They both end up at the same place. Person B can do the same again next year. Person A can’t, because the IRA-to-HSA transfer was once-in-a-lifetime. Doing the IRA-to-HSA transfer gains no advantage for Person A. It only creates a wash. Not knowing that the maneuver exists doesn’t make Person B any worse off. Therefore “forget about it” is the right conclusion for Person B.
John B says
Person A can’t do the one-time transfer again the next year (or ever again), but likewise it doesn’t prevent them from implementing your method in future years if desired.
Harry Sit says
It doesn’t, but why learn a special trick for only one year when it doesn’t do any better? Why not just do it the same way every year?
John B says
Easy and convenient, just one single transaction rather than executing multiple transactions. Nothing hard or tricky about it. Filled out a simple form at Vanguard where I have my IRA and they did the rest.
Harry Sit says
If you want easy and convenient, check out Person C.
Person C: Don’t withdraw from the IRA. Don’t increase pre-tax 401k contributions. Contribute to the HSA normally. AGI is reduced by the HSA contribution. The IRA balance doesn’t go down but the pre-tax 401k balance doesn’t go up either. The net effect on future RMDs will be the same.
That’s easy and convenient, and it still gets to the same place as both Person A and Person B. Again, the IRA-to-HSA transfer only creates a wash. It gives no financial benefits. Nor is it easier or more convenient.