Roll Over an IRA to HSA?

A new law allows you to transfer funds from one account to the other, but it might not be the best move to make.

I know that a new tax law lets you roll over money from an IRA to a health savings account. When can you do this?

A new tax law signed in late 2006 made several changes to the HSA rules, including allowing rollovers from an IRA to an HSA without taxes or penalties. But the rollover rule isn't quite as generous as it seems.

You can make the rollover only once in your lifetime, and only up to the maximum HSA contribution limit for the year -- which is $2,850 for individuals or $5,650 for family coverage in 2007 (plus an extra $800 for people age 55 and older), minus any HSA contributions you've already made for the year. And you must already have an HSA, which requires having a health insurance policy with at least a $1,100 deductible for individuals or $2,200 for family coverage in 2007.

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This rollover can provide a tax-free source of money to cover big medical expenses or help you jump-start your HSA for future savings. But if you have enough cash, it's better to make your full HSA contribution with new money because your contributions are tax deductible and can be used tax free for medical expenses. Then max out your IRA contribution ($4,000 for 2007; $5,000 if you're 50 or older). That way you can make the most of both tax-advantaged accounts without having to raid your retirement fund. If you do want to make the rollover, contact both your IRA and your HSA administrator and tell them that you want to make a direct transfer, so you don't touch the money and incur any taxes or penalties.

For more information, see Health Savings Account Answers (opens in new tab).

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.