IRA-to-HSA Rollover - A Once in a Lifetime Opportunity

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As with other self-directed retirement plans, you have multiple options for adding funds to your health savings account (HSA). You could make HSA contributions or transfer funds from another HSA, but you can also utilize a little-known option once during your lifetime - Roll funds from an IRA or 401(k) into your HSA.

There are specific limitations investors must bear in mind when considering their one chance at an IRA-to-HSA rollover:

  • The amount being rolled into the HSA cannot exceed the annual contribution limit inherent to the account. For example, a single high-deductible health plan (HDHP) participant may contribute up to $3,500 to his or her HSA in 2019. As such, the HSA holder could only roll $3,500 into the account, assuming he or she has not yet contributed for 2019 (the rollover would count against the annual contribution limit).

  • Investors cannot roll cash or assets from an ongoing SEP IRA or SIMPLE IRA. According to IRS Publication 969, a SEP IRA or SIMPLE IRA is considered ongoing if an employer contribution is made for the plan year ending with or within the tax year in which the HSA rollover would take place.

  • Account holders may only execute one IRA-to-IRA rollover per 12 months (there are no such limitations on IRA-to-IRA transfers). In addition to being your once-per-lifetime opportunity, an IRA-to-HSA rollover would also count as your one IRA-to-IRA rollover for the year.

  • You may contribute/roll your annual contribution limit for the tax year in which you open an HSA, provided you remain covered by an HDHP for 12 consecutive months. Failure to maintain HDHP coverage for the requisite 12 months would result in having to file a Form 5329 with your personal taxes.

Given the time-sensitive nature of this strategy, you may benefit from weighing the pros and cons of an IRA-to-HSA rollover. You may pursue this funding mechanism if you incur a sudden health expense but don't have the HSA funds to help cover it. You may have to come up with your entire deductible if you don't have the cash on hand to make a quick contribution, unless you have the necessary funds in your self-directed IRA. The once-per-lifetime rule caters to emergency situations like these, so you may consider holding off on an IRA-to-HSA rollover until you feel it's truly warranted.

New Direction Trust Company does not recommend or endorse any particular course of action, but we do encourage a comprehensive due diligence process on the part of our clients. For more information about HSAs or your alternative investment options, please don't hesitate to give us a call at 877-742-1270 or send us an e-mail at info@ndtco.com.

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