Rules for IRA to HSA Rollovers

You can make a tax-free rollover from your IRA to a health savings account only once in your lifetime.

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Can I make a tax-free rollover from my IRA to a health savings account? What are the rules?

Yes, you can roll money over from an IRA to an HSA as long as you have an HSA-eligible high-deductible health insurance policy (to qualify to make HSA contributions in 2013, your health insurance policy must have a deductible of at least $1,250 for individual coverage or $2,500 for family coverage). You can make the tax-free rollover from your IRA to an HSA only once in your lifetime, and the amount is limited to the maximum HSA contribution for the year minus any contributions you've already made for the year. For 2013, the maximum HSA contribution is $3,250 for individual coverage or $6,450 for family coverage, plus a $1,000 catch-up contribution if you're 55 or older.

Even though you have until the tax-filing deadline to make new HSA contributions (April 15, 2014, for 2013 contributions), the IRA-to-HSA rollover counts for the calendar year the transfer is made.

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After the money is rolled over, you can withdraw it from the HSA tax-free for medical expenses in any year. The rollover can help you beef up your HSA, especially if cash is tight. But if you have enough money outside the IRA, it's usually better to contribute new money directly to the HSA rather than make the rollover. That way, you can take a deduction for your HSA contribution and max out your IRA contribution for the year, too.

It's much better to roll over money from a traditional IRA than a Roth, because you can already access Roth contributions tax- and penalty-free at any time, and you can withdraw Roth earnings tax-free after age 59½. Rolling over money from a traditional IRA to an HSA, on the other hand, avoids the tax bill and potential penalty you would have if you withdrew the money from the IRA.

If you want to make a rollover, contact both your IRA and HSA administrators and tell them that you want to make a direct transfer. Also keep in mind the timing of the transfer. You must continue to be enrolled in an HSA-eligible high-deductible health insurance policy for 12 months after you make the transfer, says Roy Ramthun, of HSA Consulting Services, in Washington, D.C. Otherwise, the money transferred will be considered a taxable withdrawal from the IRA, even though it remains in the HSA; you'll owe taxes on the withdrawal and may have to pay a 10% early-withdrawal penalty if you're under age 59½.

For more information about HSAs, see FAQs About Health Savings Accounts. For detailed information about the tax rules for the rollover, see this IRS bulletin.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.