Yes, you can roll money from a traditional IRA into an HSA to transform your tax-deferred savings into tax-free withdrawals. However, you may only do so if you are using those dollars for medical bills. To get the biggest tax bang for your bucks, you’ll want to contribute new funds to the HSA.
What happens if someone, who is now covered by Medicare, started an HSA while they were working and now wants to fund that HSA with IRA money? Can it be done? Are there limits to how much can be transferred to an HSA?
Kiplinger, in its recent article, “Transferring IRA Money to a Health Savings Account,” explains that you can only transfer money from an IRA to an HSA, if you’re eligible to make new HSA contributions. A person who’s enrolled in Medicare can no longer contribute to an HSA. However, the money in the account can be used tax-free for eligible medical expenses. Now that you’re over 65, these expenses include Medicare Parts B and D as well as Medicare Advantage premiums.
Individuals who still qualify to make HSA contributions, can make a one-time rollover from an IRA to an HSA. That can be a wise way to build up the account, if you don’t have other cash to contribute. You currently must 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. In addition, the annual contribution limit is the same, whether the money is coming from cash, an IRA rollover or a combination of the two.
Remember that you are required to transfer the money directly from the IRA to the HSA for the rollover to be tax-free. Ask your HSA administrator about how to do this. You can only roll money over from an IRA to an HSA once in your lifetime.
A rollover lets you convert tax-deferred dollars into tax-free money, if you use the withdrawals from the HSA for medical expenses. However, you’ll get a better tax benefit, if you can contribute new money to the HSA instead.
By doing so, you have an opportunity to have more tax-deferred money growing in the IRA while, at the same time, getting a nice tax deduction for your contributions to the HSA.
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