Using pre-tax dollars for out-of-pocket medical expenses is really smart. But what if you don’t have the money to contribute to your Health Savings Account before year-end? Once during your lifetime, you can transfer funds from your IRA to your HSA.

Funding your Health Savings Account (HSA) can be difficult, especially if you or your spouse have had your earnings reduced or eliminated. Because an HSA can provide benefits now as well as after you retire, you may want to consider using your once-in-a-lifetime opportunity to fund your HSA from your IRA.

Background

When your medical coverage is provided through a high deductible health plan (HDHP), you are entitled to make pre-tax contributions to a Health Savings Account (HSA).  The funds in your HSA are available to pay out-of-pocket medical and other eligible expenses now and after you retire.  The funds in the HSA can be invested.  Any income earned in the HSA is not taxable as long as any withdrawal from the HSA is an eligible expense.  If you use the funds in the HSA to pay expenses that do not meet the eligibility requirements, the withdrawal amount is subject to income tax plus a 20% penalty.

In 2015, anyone with a self-only HDHP can contribute $3,350 to an HSA.  For a family plan, the HSA contribution amount for 2015 is $6,650.  An additional catch contribution of $1,000 can be made to the HSA for participants who are age 55 to 64.  The intent of the catch-up contribution is to allow excess funds to accumulate for expenditures after the individual is eligible for Medicare coverage (age 65).

An employer can contribute to an HSA as part of the employee’s benefit package.  Any amount contributed by the employer is not taxable to the employee.  The total contribution by the employer and the employee cannot exceed the limits noted above.

IRA Funds for HSA Contribution

All contributions to an HSA must be made in cash.  You can not contribute stock, mutual funds, or other property.  However, when cash is short, you have a one-time opportunity to fund your HSA from your traditional IRA or Roth IRA.

To avoid any taxation of the funds coming out of the IRA, the HSA contribution must be made directly from the trustee of the IRA to the trustee of the HSA via electronic transfer or by check payable to the HSA account.

The transfer from your IRA to your HSA can only be done once during your lifetime. Likewise, you must be the primary owner of the HDHP to use your IRA for funding of the HSA. You cannot use funds from a spouse’s IRA to fund the HSA if you are the primary owner of the HDHP, even though your spouse may be a covered member of the health plan.

Since the IRA funds are going directly into your HSA account, the funds are not taxable to you and are not deductible on your taxes. Likewise, the amount transferred from your IRA reduces the amount that you can contribute to your HSA. For example, if you are age 30 and have a self-only plan ($3,350 maximum HSA contribution) and you use your once-in-a-lifetime transfer to move $2,500 from your IRA to your HSA, you can only contribute the remaining eligible amount of $850 to your HSA from your personal funds. The $850 is the only portion of the total contribution that is deductible on your income taxes.

Form 8889 must be completed and filed with your tax return each year that you have a contribution to and/or distribution from your HSA. This form will document the sources for your contributions and help you to calculate the amount, if any, that is deductible on your tax return.

Benefit of Funding HSA with IRA

If you have another source besides your IRA for funding your HSA, use those dollars first. However, if your cash flow does not allow you to do so, then using funds from your traditional or Roth IRA makes sense. Once funds are in the HSA, any investment income is tax-free and the funds can be used now or in the future to pay medical and other eligible expenses on a pre-tax basis.

Since income earned in a Roth IRA is also tax-free, you would gain more tax benefit by moving funds from a traditional IRA.

Summary

The HSA is an opportunity to pay out-of-pocket medical expenses with pre-tax dollars. You should try to fund to the maximum every year. If cash is short, using your once-in-a-lifetime transfer from your IRA can make sense for you and help you get through a cash crunch. 

Elaine E. Bedel, CFP, is CEO and president of Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. She is a featured guest each Wednesday on the WTHR (NBC, Indianapolis) Channel 13 News at Noon, “Your Money” segment.  Elaine’s book, “Advice You Never Asked For… But wished you had,” is available on Amazon.com. For more information, visit www.BedelFinancial.com or email Elaine at ebedel@bedelfinancial.com.

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