Transferring IRA Money to an HSA

Did you know you can make a one-time, penalty- and tax-free money rollover from your individual retirement account (IRA) to a health savings account (HSA)? The process is officially known as a qualified HSA funding distribution, and it was made possible by the Health Opportunity Patient Empowerment Act in 2006.

What Is a Health Savings Account (HSA)?

A health savings account (HSA) is designed for people with high-deductible health plans (HDHPs). These are health insurance policies with annual deductibles of at least $1,600 for individuals and $3,200 for family coverage for 2024 ($1,650 and $3,300 in 2025).

Here are a few key figures you need to know about the HSA:

• For 2024, the annual maximum out-of-pocket expense must be less than $8,050 for individuals ($8,300 in 2025) and $16,100 for families ($16,600 in 2025).
• The annual contribution limit for individuals is $4,150 for 2024 ($4,300 for 2025) and $8,300 for families ($8,550 for 2025).

Remember that your premiums don’t count as out-of-pocket costs, but deductibles, copayments, and coinsurance do.

You contribute to an HSA using pre-tax funds, which reduces your taxable income. You can then withdraw money from your HSA tax-free if you use it for qualified medical expenses. However, if you’re 64 or younger, you’ll owe taxes and a 20% penalty if you use funds for non-medical reasons. Withdrawals for non-medical reasons don’t incur the penalty after you turn 65 or if you have a disability at any age, although they’re still taxed at your current tax rate.

You can keep your HSA funds in the account to use later in life, such as after you retire. The account (and all the money in it) belongs to you, even if you change health insurance plans, switch jobs, or retire.

IRA-to-HSA Rollover Rules

You can move funds from an IRA to an HSA only if you’re eligible to contribute to your HSA. In other words, you need to do the transfer while you’re covered by an HDHP and are otherwise qualified to have an HSA.

Moreover, the IRA-to-HSA rollover includes a testing period that requires you to remain eligible for your HSA for 12 months following the transfer. This means you must stay in your HDHP at least until the testing period expires. If you don’t remain eligible (for example, you switch to a non-HDHP), you’ll need to include the money you rolled over as income when you file your taxes. In addition, the amount will be subject to a 10% penalty.

You can only roll funds from an IRA to an HSA once during your lifetime. The maximum amount you can roll over is the same as your annual HSA contribution limit for that year.

The limits for 2024 and 2025 are as follows:

• $4,150 ($4,300 for 2025) for individuals, with an additional $1,000 catch-up contribution if you’re 55 or older.
• $8,300 ($8,550 for 2025) for family coverage, with the same $1,000 catch-up contribution.

Keep in mind that HSAs and IRAs are individual accounts. There’s no such thing as a joint IRA or a joint HSA. This means that you and your spouse can each roll funds over from your respective IRAs to your own HSAs but not to each other’s HSAs if you’re married. But you can cover health care expenses for each other and other family members out of either account.

Rollovers From Other Accounts

Traditional IRAs

You can roll over from a traditional or a Roth IRA to an HSA. However, it’s more advantageous to roll from a traditional IRA as this account offers you more benefits. That’s because withdrawals of contributions from a Roth IRA are already tax and penalty-free at any time, and you can withdraw earnings tax-free after age 59½.

A rollover from a traditional IRA to an HSA allows you to load your HSA immediately to pay for medical expenses on a tax-free basis. Any nondeductible IRA contributions you make are not eligible for the rollover, so they will remain in your IRA. Since withdrawals from the HSA are tax-free when used for qualified medical expenses, you would see a tax benefit versus a traditional IRA, whereby you would pay income tax on the withdrawn funds.

401(k) and 457 Plans

You may also be able to fund your HSA by rolling over money from other types of retirement accounts, such as a 401(k) or 457 plan. To roll the funds over from other retirement accounts, you must first roll those funds into an IRA. Once the funds are in an IRA, you can make your one-time, tax-free transfer into your HSA. This type of move is tricky and should be done with the help of a professional financial advisor.

Other Ways to Fund an HSA

If you can afford to contribute to both your HSA and a traditional IRA, you’ll lower your adjusted gross income (AGI) and reduce your taxes. And your IRA will continue to grow for retirement.

If money is tight and you’re 59½ or older, you could take a regular withdrawal from your IRA and use it to contribute to your HSA. The tax bite from the traditional IRA withdrawal and the tax deduction from the HSA contribution should nearly cancel each other out. And most importantly, you can do this more than once—in fact, every year if you want.

The Bottom Line

Health savings accounts (HSAs) offer tax benefits since your contributions reduce your taxable income. HSAs can be used to pay for medical expenses, including copays and prescriptions. However, HSAs have annual contribution limits, and you must be enrolled in a high-deductible health plan to qualify. You can also roll over funds from an IRA into an HSA. Please consult a tax professional to determine if an HSA or transferring your IRA into an HSA is the best financial decision for you.