Here’s a once-in-a-lifetime offer that’s been waiting in the federal tax codes for your right moment.
Retired workers can move money from their Individual Retirement Accounts to their Health Savings Accounts and the distribution is tax-free. In fact, those taxpayers can transfer as much as an entire year’s contributions to an HSA.
What’s really happening is that you can use your traditional or Roth IRA to pay the normal contributions you would place in your HSA for that year. Each dollar transferred from the IRA reduces the amount you can contribute from other sources. The Internal Revenue Service calls this tactic a “qualified HSA funding distribution.”
As handy as it might be, remember it’s a one-time move from a single IRA for each taxpayer. In fact, if you want to draw from multiple IRAs, you’ll have to collect the money into one IRA to make the shift.
There are some limits. This tax-free distribution works for traditional and Roth IRAs, but not for SEP IRAs or SIMPLE IRAs.
You also have to make sure it’s a direct transfer from the IRA custodian to the HSA’s trustee. Don’t take possession of the money – even briefly – along the way, or it becomes taxable.
Also, you must make the move before the end of the tax year involved. The special rule allowing contributions to HSAs up until the tax-filing deadline (normally April 15) does not apply, the IRS says.
There is a line for reporting this one-time-only transfer on IRS Form 8889, which deals with HSAs.
EricJohn Ltd. can guide you through those details, as well as any effects on your IRAs. Let us know!