The 411 on Health Savings Account Rollovers

Kiplinger’s recent article, “Rolling over Retirement Savings to a Health Savings Account,” advises that you can make a tax-free rollover into an HSA (health savings account) from an IRA—but not from a 401(k), 457, or other retirement plan.

But if you have a 401(k) from a former employer, you may be able to make the move by rolling it over into an IRA first and then making a tax-free direct transfer from the IRA into your HSA. At that point, you can use the money in the HSA tax-free for medical expenses in any year.

Remember that if you withdraw funds from a traditional IRA to pay medical expenses or anything else, there will be taxes to pay, and you may have to pay a 10% penalty if you’re under 59½. You can make penalty-free IRA withdrawals for medical expenses that are more than 10% of your adjusted gross income for the year, or more than 7.5% if you’re 65 or older.

Here’s the big point to keep in mind: you can make a tax-free rollover from an IRA to an HSA only once in your lifetime. And you must qualify to make new HSA contributions that year. This year you need to have a health insurance policy with a deductible of at least $1,300 for individual coverage or $2,600 for family coverage.

The size of the rollover is restricted to the annual HSA contribution limit, minus any money you’ve already contributed for the year. For this year, you’re allowed to contribute up to $3,350 to an HSA if you have individual coverage or $6,750 for family coverage, plus an extra $1,000 if you’re 55 or older anytime during the year.

If you have the extra cash, typically you’re better off using the new money for HSA contributions so that you can keep more money growing tax-deferred in your IRA and also take a tax deduction for new HSA contributions.

Reference: Kiplinger’s (April 20, 2016) “Rolling over Retirement Savings to a Health Savings Account”