Little Known Method to Fund HSA with your IRA

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Oct 01, 2017

By Barry Frantz, EA Partner at Terry Lockridge & Dunn

The IRS allows you to make one lifetime qualified health savings account (HSA) funding distribution from your IRA. This qualified HSA funding distribution: (1) must be contributed to the individual's HSA, (2) must be contributed in a direct trustee-to-trustee transfer, and (3) cannot be made from an ongoing SEP or a SIMPLE IRA.

Why would you want to do this? Perhaps you have a major medical expense, but not enough funds in your HSA account to cover the costs. Perhaps you want to jump start your HSA funding in tax efficient manner. Funds from your IRA that are contributed directly (trustee to trustee) to your HSA will not be taxable to you, and will not be subject to the 10% additional tax on early distributions (if applicable). You will not, however, be able to deduct the medical expenses paid with these funds.

How much can you distribute in this method? The amount is limited to what your annual HSA contribution limit for the year is, less any other HSA contributions made by you in that calendar year. For 2018, the limit for self-only high deductible health plan (HDHP) coverage will be $3450; for family coverage, the limit is $6,900. Individuals over 55 years of age can contribute an additional $1,000. The lone exception to the once in a lifetime rule is if you are in self-only HDHP when you do the qualified HSA funding distribution and then switch to a family HDHP during the same tax year. If this occurs, you can make an additional distribution up to the higher HDHP limit for that year.

Another rule to remember: An individual who elects a qualified HSA funding distribution must remain eligible for an HSA during the testing period. The testing period begins with the month of the contribution and ends on the last day of the 12th month following the month of the contribution. If the individual does not remain an eligible individual during the testing period, the amount of the IRA distribution and HSA contribution is includible in the individual's gross income for the tax year of the first day during the testing period that the individual is not an eligible individual. A 10% additional tax also applies to the amount includible. These rules do not apply if the individual ceases to be eligible for an HSA because of death or disability.

This is not an often-used method for funding an HSA, but it does have advantages in the right circumstances. Please feel free to reach out to Barry Frantz at bfrantz@tld-inc.com if you believe this may make sense for you.


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