retirement

Transferring IRA Money to a Health Savings Account

Rolling money from a traditional IRA into an HSA turns tax-deferred dollars into tax-free withdrawals for medical bills. But you’ll maximize the tax breaks if you contribute new money to the HSA.

Question: I’m now on Medicare, but I had opened a health savings account when I was still working and was covered by a high-deductible health insurance policy. Can I transfer funds from a traditional IRA to a health savings account now? How much can be transferred?

Answer:

You can only transfer money from an IRA to an HSA if you’re eligible to make new HSA contributions. Because you’ve enrolled in Medicare, you can no longer contribute to your HSA, although you can use the money in the account tax-free for eligible medical expenses. And now that you’re over 65, these expenses include Medicare parts B and D as well as Medicare Advantage premiums.

People who still qualify to make HSA contributions can make a one-time rollover from an IRA to an HSA, which can be a good way to build up the account if you don’t have other cash to contribute. You must currently have an HSA-eligible health insurance policy with a deductible of at least $1,300 for single coverage or $2,600 for family coverage. The amount you can roll over is the same as your annual HSA contribution limit -- up to $3,400 in 2017 if you have single coverage or $6,750 if you have family coverage, plus an extra $1,000 if you’re 55 or older. The annual contribution limit is the same, whether the money is coming from cash or an IRA rollover or a combination of the two.

You must transfer the money directly from the IRA to the HSA for the rollover to be tax-free, says Eric Dowley, senior vice president of HSAs for Fidelity. Contact your HSA administrator to find out how to do this. You can only roll money over from an IRA to an HSA once in your lifetime.

By doing a rollover, you’re converting tax-deferred dollars into tax-free money if you use the withdrawals from the HSA for medical expenses. But you’ll get an even better tax benefit if you can contribute new money to the HSA instead. That way, you can keep more money growing tax-deferred in the IRA and get a tax deduction for the new HSA contribution.

For more information about HSAs, see 10 Things You Need to Know About Health Savings Accounts. For more about the rules for rolling over money from an IRA to an HSA, see this IRS Bulletin.

Most Popular

Tax Wrinkles for Work-at-Home Employees During COVID-19
taxes

Tax Wrinkles for Work-at-Home Employees During COVID-19

Are your home office expenses deductible? How does going out of state to work for a while affect your tax picture? There are some interesting wrinkles…
November 9, 2020
Retirement: It All Starts with a Budget
personal finance

Retirement: It All Starts with a Budget

When you’re meeting with your financial planner, do you talk about your budget? If not, you should.
November 10, 2020
Will Joe Biden Raise YOUR Taxes?
taxes

Will Joe Biden Raise YOUR Taxes?

During the campaign, Joe Biden promised that he would raise taxes for some people. Will you be one of them?
November 10, 2020

Recommended

Making Wise Choices During Open Enrollment
health insurance

Making Wise Choices During Open Enrollment

Contributing Editor Lisa Gerstner runs through the new variables of the 2020 open enrollment season. Also, hosts Sandy Block and David Muhlbaum talk a…
November 17, 2020
What the New President Means for Your Money
Politics

What the New President Means for Your Money

President-Elect Biden wants more consumer protections and perks for the middle class and seniors.
November 17, 2020
Big Changes Likely for Social Security, Medicare Under a Biden Presidency
Making Your Money Last

Big Changes Likely for Social Security, Medicare Under a Biden Presidency

The new president and a fresh Congress will sooner or later have to face the twin safety net programs, both sorely in need of help.
November 10, 2020
Bad News on IRA and 401(k) Contribution Limits for 2021
retirement plans

Bad News on IRA and 401(k) Contribution Limits for 2021

Retirement savers will be disappointed with the contribution limits for next year, but at least more people will qualify for retirement tax breaks in …
November 5, 2020