Did you know you are allowed a onetime tax-free transfer from an IRA to your Health Savings Account (HSA)? Well, you are–you’re welcome! Don’t close down your browser in a mad dash to transfer funds from your IRA to your HSA; there is plenty to evaluate to determine if this type of transfer is appropriate for you. I recommend sitting down with a financial advisor, preferably a CERTIFIED FINANCIAL PLANNER™ professional, to assess your financial situation.
Rarely do we get a freebie from the IRS, but in the case of the IRA transfer to HSA we get a gift. Assuming that you and your financial advisor decide that this type of transfer is appropriate, you are able to make a once in a lifetime transfer from an IRA to your HSA on a tax-free basis; this transfer is viewed in the same light as a trustee-to-trustee IRA transfer, which means it is not taxable. As you are well aware, distributions from a HSA for qualified medical expenses are tax-free. Allow me to reiterate: in order to receive the tax-favored distribution from your HSA, the expenses must be qualified health care expenses. By shifting assets from an IRA, where distributions will be taxed upon withdrawal, to an HSA, you are able to avoid (not evade, which is illegal) taxes on the would-be IRA distribution.
Although the IRS is being generous in allowing this tax-free transfer, they impose a cap to the amount allowed to be transferred. The maximum transfer allowed is limited to the annual HSA contribution amount, which in 2016 is $3,350 (single) and $6,750 (family). Like an IRA, there is a catch-up provision for individuals over 50 of $1,000–from there, you can do the math to determine your maximum transfer amount. It should be noted, the transferred amount reduces your out of pocket savings into your HSA; it is applied towards the annual contribution limit. For example, if you are single and transfer $3,350 from an IRA into a HSA in 2016, you would not be able to contribute any more to your HSA for the year.
The timing of your transfer also needs to be taken into consideration. You have until April 15th (tax day) to make contributions to your HSA for the prior year, but a transfer is recorded in the calendar year it occurs. This could impact your annual savings if not planned properly. As you can see, there are numerous things to consider when making the most of this transfer, which why professional assistance is recommended.
Despite its nuances, the strategy can be advantageous for both Millennials and Boomers. Millennials have the opportunity to transfer assets from an IRA, invest them in their HSA (which is allowed, but options are not always as good as an IRA), and allow those assets to grow for future use. A potential opportunity cost for Millennials is transferring a larger amount in the future. Historically, HSA contribution limits increase, and since this is a once in a lifetime opportunity, a millennial is giving up the opportunity to make a larger one time transfer in the future–assuming history repeats itself. It may be wise for Millennials to defer this opportunity to take advantage of a greater transfer in the future, and continue to make the tax deductible contributions to their HSA while they have the income. Boomers can take advantage of this strategy to boost their HSA balance during a time in their life when they are probably not contributing to it. If an IRA is being used to fund, or supplement retirement income, which would include covering healthcare expenses, it makes sense to transfer to the HSA to avoid the tax on the IRA withdrawal.
As you can see, this is a great opportunity to increase the balance of your HSA and save on taxes. However, there are plenty of minute details that make the implementation of this strategy tricky. Consult a financial professional to help you determine the best way to take advantage of this opportunity. And whatever you do, don’t squander it because you only get one shot!
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Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.