In our last article, we discussed the many benefits of using your HSA as a retirement plan. We could have stopped there, but we wanted to follow that with a great HSA strategy- the once-in-a-lifetime IRA to HSA rollover. Here's how it works:
To help you fund your HSA, there is a special rule little known to the public: You are allowed to roll over funds from your IRA to your HSA once during your lifetime. This is called a qualified HSA funding distribution (QHFD).
No tax is paid on the rollover. Thus, you'll never have to pay taxes on the funds you later withdraw from your HSA for medical expenses. You read that correctly- Tax free withdrawals!!
The maximum amount you may roll over is the amount of the year's HSA contribution limit. This is a lifetime limit, not a limit per IRA.
Thus, for 2023, the maximum rollover is $3,850 if you have individual coverage or $7,750 if you have family coverage. If you're age 55 or over (as of the end of the year), you can add a $1,000 catch-up contribution for a total of $8,750. While this is not a life-changing amount of money, it's a strategy that is certainly worth using!
If you have individual coverage when you make your rollover, but you switch to family coverage later in the year, you can make a second rollover. But your total rollover can't be more than the contribution limit for family coverage plus any catch-up contribution.
The ideal time to do an IRA-to-HSA rollover is when you're eligible for an HSA catch-up contribution. Eligibility goes from the year you reach age 55 through the month you reach age 64 (assuming you intend to enroll in Medicare at age 65). This will give you the maximum rollover amount.
You must complete your IRA-to-HSA rollover by December 31st of the current year. This differs from regular IRA or HSA contributions, which may be made by the due date for your tax return for the following year.
The rollover amount isn't included in your income, isn't deductible, and reduces the amount that can be contributed to your HSA for the year. For example, if you're under age 55 and you roll over $7,750 to your family HSA, you can't put any more money in your HSA that year.
Make sure the amount you roll over, your employer's contributions, and your own (if any) are less than the annual limit. If you contribute over the annual limit, you must pay a 6% excise tax on your excess contribution that year and in each year you fail to remove the excess contribution and its earnings.
The excess contribution is also considered taxable income. If you correct the error before the tax filing deadline for the year, however, you may be able to avoid income tax and the excise tax for that year.
You can roll over funds from your traditional IRA, but not from a SEP-IRA or SIMPLE IRA to which your employer (or you, if self-employed) contributes during the year.
There is no reason to do HSA rollovers from a Roth IRA, since Roth withdrawals are already tax-free.
You can't do a direct rollover from employer-based retirement accounts such as a 401 (k), 403(b), or 457 account. But you could roll over money from such an account to your IRA and then roll it over to your HSA.
After the death of an IRA owner, an IRA-to-HSA rollover may be made for the benefit of the IRA beneficiary. The rollover counts toward the annual required minimum distribution (RMD) for the IRA.
If you own two or more IRAs and want to use money from more than one to fund your rollover, you must consolidate your IRAs into a single IRA and then make your rollover from that IRA.
Note that the account holder must own both the HSA and the IRA to make the rollover-for example, a spouse cannot roll over IRA money into the other spouse's HSA.
One potentially troublesome requirement is the "testing period."
You must be enrolled in an HSA-eligible plan upon the month of your IRA-to-HSA rollover and stay enrolled for at least 12 months following the month of the rollover date.
For example, if you do a rollover to your HSA on August 10, 2023, your testing period begins in August 2023, and ends on August 31, 2024.
If you cease to be enrolled in your HSA plan during the testing period, the entire rollover must be included in income and is subject to an additional 10% penalty tax.
Problems with the testing period usually crop up for people who reach age 65 and enroll in Medicare during the 12-month testing period. Once you enroll in Medicare, you are not allowed to make any contributions to your HSA. If you do so during the testing period, your rollover is disqualified, and the testing period is failed.
The obvious way to avoid such problems is to plan ahead. Make sure you do your rollover at least 12 months before the month you turn age 65 (unless you plan on delaying enrolling in Medicare because you have other coverage). If you do delay Medicare beyond age 65, note that you'll receive six months of retroactive Medicare coverage when you do enroll. You can't make HSA contributions for those months.
An IRA-to-HSA rollover must be done as a direct transfer. This means that it must be initiated by your IRA custodian and performed as a trustee-to-trustee transfer.
The money should never be in your hands. Request and complete a transfer form from your HSA provider who forwards it to your IRA custodian. Your IRA custodian then sends a check directly to your HSA provider.
The rollover is listed as a qualified HSA funding distribution on line 10 of Form 8889, Health Savings Accounts (HSAs), for the year in which the distribution is made.
There is no such thing as a joint HSA.
Most married couples have a single HSA with family coverage in the name of one spouse. But spouses may each have their own HSAs.
Spouses can each roll over funds from their own IRA to their own HSA, but not to each other's HSAs.
Should both spouses desire family coverage, they will share one family HSA contribution limit equal to the limit for family coverage. The limit is divided equally unless spouses agree otherwise.
Each spouse over age 55 also qualifies for an annual catch-up contribution, which must be made to his or her own HSA.
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