For many people, health savings accounts (HSAs) provide an affordable way to pay for medical expenses.
Feb. 5, 2020 Article

IRA To HSA Rollover: Is an IRA to HSA Rollover Right for You?

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For many people, health savings accounts (HSAs) provide an affordable way to pay for medical expenses. When paired with a high-deductible health plan, the funds contributed to an HSA can be used to pay for qualified medical expenses at any time without federal tax liability or penalty. An HSA can make sense for individuals with fairly predictable medical expenses who wish to lower their monthly premiums. A major advantage of an HSA is that any unused funds roll over and can accumulate year after year, allowing an individual to save for future medical expenses.

However, a challenge exists for individuals as they initially move from a traditional, low-deductible health plan to a high-deductible health plan and HSA, as it takes time to build up the balance in an HSA account to ensure adequate funds are available to cover any unexpected medical expenses.

A potential solution can be to initiate a tax-free rollover from an individual retirement account (IRA) to fund the HSA. Here, we examine this option and provide insight into whether or not a rollover might make sense for your particular situation.

Contribution limits

If you have an HSA-eligible, high-deductible health insurance plan, you may be eligible to make one tax-free rollover in your lifetime. The rollover amount is limited to the maximum HSA contribution for the year minus any other contributions you’ve made during the year. In 2020, the HSA contribution maximum is $3,550 for individuals, or $7,100 for individuals with family coverage (an extra $1,000 catch-up contribution is permitted by year-end1 for those age 55 or older).

Transfer process

The transfer must be considered a direct rollover, meaning the IRA account holder cannot gain direct access to the funds. The best approach is to coordinate between the IRA custodian and the HSA custodian to ensure the funds are sent directly to the HSA account.

Permitted IRAs

Only certain types of IRAs may be rolled over to an HSA. Permitted accounts include traditional IRAs, Roth IRAs and, under certain circumstances, SEP and SIMPLE IRAs. (SEP and SIMPLE IRAs may not be rolled over if they have received employer funding within the plan year ending with or within the tax year of the IRA funding.) In addition, HSAs may not be directly funded from a 401(k); however, the 401(k) owner may roll over from a 401(k) to an IRA and then roll funds from the IRA to the HSA. It is important to note that, while new HSA contributions can be made until the tax-filing deadline of April 15, an IRA to HSA rollover counts within the calendar year it is made.

It is important to note that, while new HSA contributions can be made until the tax-filing deadline of April 15th, an IRA to HSA rollover counts within the calendar year it is made.

What makes the most sense?

As with most financial decisions, the answer to the question of whether or not an IRA to HSA rollover makes sense depends on your specific financial situation and objectives. If it would take you a significant amount of time to build up your HSA account, it could make sense to initiate a rollover to ensure you have adequate funds available to pay for unexpected medical expenses. For clients nearing retirement, building up a balance in an HSA can provide another “bucket” of money for health care expenses in retirement.

On the other hand, if you have enough money to directly fund the HSA without initiating a rollover, it is often wise to do so. Common sense (and most advisors) would encourage us to save as much as possible in tax-advantaged accounts. Therefore, for individuals who are able, it is advised to leave an IRA as is and use other funds to build up the HSA.

With regard to which type of IRA to roll over, it is often better to roll over money from a traditional IRA, rather than a Roth IRA. Because they are funded with after-tax contributions, Roth IRA contributions can be withdrawn tax- and penalty-free at any time, making these funds available in case of emergency. Traditional IRA contributions, on the other hand, are subject to taxes and potential penalties upon withdrawal.

As with all financial decisions, we encourage you to reach out to your wealth advisor with any questions.

 

1 “IRS Announces 2020 HSA Contribution Limits,” Thomson Reuters. https://tmsnrt.rs/2RJE5iV

The views expressed regarding IRA Rollovers are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. As such, the information contained herein is not intended to be personal legal, investment or tax advice. Nothing herein should be relied upon as such, and there is no guarantee that any claims made will come to pass. The opinions are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information. It is not intended to be a solicitation to buy or sell or engage in a particular investment strategy. Before initiating a rollover, please consult with a financial or tax professional.

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