When To Use An IRA To Fund Your HSA

by Bob Carlson | Originally posted on Forbes

Health savings accounts (HSAs) are the best retirement planning tool available, and there’s a little-known legal trick that can help fully fund an HSA.

An HSA has three powerful tax benefits. Contributions to the account are tax deductible when you make them, or excluded from gross income when an employer makes them. The account can be invested, and income and gains compound tax free in the account. When distributions are taken from the account to pay for qualified medical expenses, the distributions are tax free.

The annual contribution limit for an HSA in 2021 is $3,600 if you have individual health insurance coverage and $7,200 if you have family coverage. For people age 55 and older, an additional $1,000 catch-up contribution is allowed. To qualify for an HSA, you must have a qualifying high-deductible medical insurance policy. The deductible for individual coverage must be at least $1,400 and for family coverage the deductible must be $2,800.

Contributions to an HSA can’t be made after you’re a Medicare beneficiary.

If you want qualify for an HSA and want to fund it but are short of funds, you might be able to fund the HSA from your IRA using a qualified HSA funding distribution (QHFD).

In a QHFD, an individual has funds transferred (or rolled over) from an IRA to an HSA. The rollover, combined with any other contributions to the account during the year, can’t exceed the year’s contribution limit. The rollover is tax free. So, you’re able to move funds from your IRA to the HSA, which has even better tax benefits than the IRA.

There are some restrictions on the IRA-to-HSA transfer.

The most important restriction is that this is a one-time only rollover. It’s a once-in-a-lifetime limit per taxpayer, not per IRA. So, if you have multiple IRAs, you still can do only one QHFD during your lifetime. If one IRA doesn't have enough funds to transfer as much as you want to the HSA, you first need to transfer enough funds from one IRA to another so that one IRA has enough funds. Then, you do one QHFD from one IRA.