Money is tight for many of us these days and unexpected medical expenses can be extremely frightening—especially if you don’t have a good health insurance plan to help defray costs. In my last blog, I offered one solution in the form of a health savings account. Fortunately, there is now another option to help fund your health savings account by using money from your regular IRA. Here’s what you need to know.
The IRS allows each taxpayer to make a one-time (once in a lifetime) transfer from their IRA to their health savings account. There are, of course, requirements for this to happen:
- You must be eligible to contribute to a health savings account. For the most part, this means you must have a qualified high deductible health plan. See our last blog for more information.
- You must continue to be enrolled in a high deductible health plan for at least twelve months after you make the transfer.
- The contribution to the health savings account must be a direct transfer from your IRA administrator to your health savings account administrator.
- The maximum amount of the transfer is the annual health savings account contribution limit less any contributions you or your employer have already made to your health savings account. For 2020, the individual contribution limit is $3,550; the family limit is $7,100. If you are age 55 or older you can contribute an extra $1,000.
What are the benefits of making this one-time transfer?
- While distributions from a regular IRA are taxed as ordinary income, distributions from a health savings account are not taxed as long as the distributions are used to pay for qualified medical expenses. Essentially, you are converting future taxable income to non-taxable income.
- There are no required minimum distributions from health savings accounts. Regular IRAs have required minimum distributions starting at age 72 (under the CARES act).
- There are no penalties for early withdrawals from health savings accounts.
Things to consider:
- If you have the money available to make full contributions to your IRA and your health savings account, it makes sense to do both. You will have a tax deduction for both and defer taxes on the IRA contribution.
- If your income is tight and you would still like to fund your health savings account, the IRA to health savings account rollover makes sense.
- There is no tax deduction for the contribution to the health savings account if the funds are being transferred directly from your IRA.
- The distribution from the IRA directly to the health savings account is not taxed as a regular distribution would be.
- This type of transfer can take several weeks so if you want to take advantage of this opportunity in 2020, you need to start the process as soon as possible.
Though it’s not a fit for everyone, using your IRA to fund your HSA makes sense for certain individuals. Have questions about funding your account in this way? Please reach out! I’d love to help.
Judith Ackland has more than 26 years of experience in accountancy and financial planning, including seventeen years as a CFO of a diverse business. She started Crystal Financial in 2010 to help a wide array of individuals, families, and business owners better understand their finances and how good financial management could help them achieve their goals. Judith has an MA in Professional Accountancy from the University of Nebraska at Lincoln as well as a Certified Public Accountant Certificate and a Certified Financial Planner designation.
