ONCE-IN-A-LIFETIME OPPORTUNITY: IRA-TO-HSA TRANSFER

Did you know that once-in-your-lifetime you can convert dollars, which would inevitably be taxed when distributed from your Traditional IRA, to your Health Savings Account (HSA) where they’ll grow and be distributed tax-free?

​Sounds great, right? Here’s how…
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First, you must be HSA eligible and remain HSA eligible for at least 12 months. If you are unfamiliar with how HSAs work or need a refresher check out our previous blog post: How a Health Savings Account (HSA) Works.

You are allowed to transfer up to the HSA annual maximum contribution limit for that year. The amount of your HSA contribution will be reduced dollar-for-dollar in the year you make a transfer.
2023 HSA Contribution Limits:

• $3,850 for individuals, with a $1,000 catch-up contribution if you’re 55 or older
• $7,750 for family coverage, with a $1,000 catch-up contribution if you’re 55 or older

Executing a transfer for the family coverage maximum with the catch-up provision can become complex.

A spouse can make their own catch-up contribution in addition to the family annual max contribution limit, but cannot make a catch-up contribution on their spouse’s behalf. This means that a spouse can make a max family contribution of $7,750 (2023) plus their own $1,000 catch-up contribution from an IRA transfer in a single year while their spouse would need to make their own $1,000 HSA catch-up contribution to their own HSA. The spouse’s $1,000 contribution should be made out-of-pocket so the spouse will be eligible to make the max IRA-to-HSA transfer in the future.
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For example, in the following calendar year, your spouse can categorize their HSA as a family HSA and use their own once-in-a-lifetime Qualified Funding Distribution to fund that account. You would be allowed to make your own $1,000 catch-up HSA contribution as well. This would allow your family to maximize the benefits of the IRA-to-HSA transfer opportunity.

An IRA-to-HSA transfer must be executed as a trustee-to-trustee transfer. This means that the funds transferred must be sent directly from your IRA account to your HSA account. It would be prudent to contact your HSA provider about the transfer as they could help with insight into their institutional guidelines for executing the transfer. After contacting your HSA provider, you will need to contact your IRA custodian as they will initiate the transfer. Depending on the IRA custodian, there may be forms that need to be filled out.

If you execute an IRA-to-HSA transfer and become ineligible for an HSA within a 12-month period from the date of the transfer, you could be subject to income taxes and a 10% penalty (prior to age 59 ½) on the amount transferred.
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It is important to be cautious of enrolling in Medicare at age 65 when executing an IRA-to-HSA transfer. Once you enroll in Medicare you are no longer eligible for a Health Savings Account. This makes it important to execute an IRA-to-HSA transfer at least one year prior to enrolling in Medicare to remain eligible for the 12-month testing period and avoid any penalties.