If you have a health savings account (HSA), rolling over money from your individual retirement account (IRA) to your HSA is an immediate means of funding the account. Although the two accounts have distinct functions, both IRAs and HSAs offer similar tax benefits for the money within them. While federal law allows for a transfer of funds from an IRA to an HSA without tax penalties, federal regulations limit the administration of such transactions.
You may only transfer money to an HSA from a traditional IRA or a Roth IRA. Ongoing employer-based SEP and SIMPLE IRAs do not qualify for HSA rollovers, and neither do 401(k) plans. The federal government considers a SEP or SIMPLE IRA as ongoing if your employer makes a contribution to the account for the tax year in which you transfer funds to an HSA. However, if your employer makes no contribution to your SEP or SIMPLE IRA during the tax year you make the transfer, you may rollover the funds penalty and tax free.
The funds transfer between your IRA and your HSA must occur in a direct account trustee-to-trustee transfer. You may not personally take a distribution from your IRA to deposit in your HSA. Doing so subjects the withdrawal to usual distribution taxation and early withdrawal penalties. Additionally, once you complete the transfer, you must maintain your HSA account eligibility through a qualified high deductible health plan for a minimum of 12 months following the transfer. If you close your account, or switch to a non-qualifying health plan before that time period expires, you must claim the IRA-to-HSA rollover as gross income.
Although you may want to use an IRA-to-HSA transfer to jump start your health savings account, you can only rollover an amount equal to or less than your HSA maximum contribution limit. The amount of your maximum annual contribution depends on federal contribution limits and whether you have a health insurance plan that covers you alone or your dependents as well. For example, in 2011 the maximum contribution for HSA account-holders with individual health plans is $3,050, whereas account holders with a family health plan may contribute up to $6,150.
If you decide to rollover money from your retirement account to an HSA, choose the timing and amount of the transfer carefully. Per federal law, you may only rollover funds from an IRA to an HSA tax and penalty free once in your life. Furthermore, if you’ve already contributed to an HSA during the current tax year, you cay only rollover the difference in the amount you’ve already contributed and the maximum allowable HSA contribution for the year. Federal law allows you to make a second lifetime IRA rollover to an HSA, if your HSA qualifying high deductible health insurance plan changes from self coverage to family coverage in the same year you made your first IRA-to-HSA transfer.