without incurring any taxes or penalties? According to the IRS, taxpayers are permitted to make exactly
one “qualified HSA funding distribution” during their lifetime. If you have and IRA and an HSA, it is
typically a good idea to contribute the maximum amount possible to both in order to maximize their tax
benefits, however, if you find yourself burdened with high medical expenses but have insufficient funds
within your HSA to cover those expenses, then transferring funds directly from your IRA may be your
best solution.
An HSA is a savings account that is typically available to individuals with eligible high-deductible health
plans and is used to pay qualified medical expenses with pre-tax dollars. The current annual limit on tax
deductible contributions to an HSA is $3,850 for individuals with self-only coverage and $7,750 for
individuals with family coverage. For individuals that are 55 or older, the limits are $4,850 and $8,750,
respectively. These same limits apply to an IRA-to-HSA transfer, reduced by any contributions already
made to your HSA during the year. If you decide to transfer funds from your IRA to your HSA, then this
distribution must be made directly by the IRA trustee to the HSA trustee. The funds transferred to the
HSA aren’t tax deductible, however, because the IRA distribution is excluded from your income, the
effect is the same for federal tax purposes.
Here is just one example that will illustrate the potential benefits of a qualified HSA funding distribution
from and IRA: Marilyn is 56 years old, with a self-only, high-deductible health plan. Marilyn will need
surgery for which she will incur $5,000 of out-of-pocket costs. Unfortunately, Marilyn only has $250 in
her HSA account and does not have the cash on hand to cover her medical expenses. Although Marilyn
is not able to cover her medical expenses with her current cash on hand, she does have a $75,000
balance in her traditional IRA. Marilyn may move up to $4,850 from her IRA to her HSA tax- and
penalty-free.
IRA-to-HSA transfers are a once-in-a-lifetime opportunity, but that does not mean that it is the right
move for everyone. If you are interested in making one of these distributions, our firm can help you
explore taking this step while considering your tax and financial circumstances.