Want to Fund Your HSA with Your IRA? Here's How | Ed Slott and Company, LLC

Want to Fund Your HSA with Your IRA? Here's How

By Sarah Brenner, IRA Analyst
Follow Us on Twitter: @theslottreport

Did you know that you can use your IRA to fund your Health Savings Account (HSA)? You may be able to take advantage of a little known part of the tax code that allows a transaction called a Qualified HSA Funding Distribution (QHFD).

How a QHFD Works

A QHFD is done by direct transfer from your IRA to your HSA. This transaction is not taxable or subject to the 10% early distribution penalty. The amount that can be transferred cannot exceed the amount you are eligible to contribute to your HSA for the year. For example, if you have family coverage and are age 55 or older, you may move up to $7,750 from your IRA to your HSA in 2016. The amount you can move will be reduced by any HSA contributions you have already made during the year.

You may only do one QHFD in your lifetime. There is an exception to this rule if you start out the year with self-only coverage and then later switch to family coverage. In that case, the additional amount can be transferred in the same year. Once you do a QHFD, you must remain eligible for the HSA for what is called the testing period. The testing period begins with the month of the HSA contribution and ends on the last day of the month twelve months later. There are exceptions to the testing period for death and disability.

Benefits of a QHFD

A QHFD offers some valuable benefits. This strategy can be a great way to jump start your HSA. For example, if you need funds in your HSA immediately to pay for urgent medical expenses, and don’t have the funds available to make a contribution, a QHFD may be your answer.

Also, a QHFD is also a good tool to get taxable funds out of your IRA tax free. If you move the IRA funds to your HSA, when you use them for qualified medical expenses, they will be tax and penalty free. That is a very different result than if you took a distribution from your IRA. You would be looking at a taxable distribution (and then a possible medical expense deduction).

A QHFD can also provide a unique opportunity for you to move taxable funds from your IRA and leave your basis behind. How is this possible? Well, only the taxable portion of your IRA can be moved as a QHFD. If you made any nondeductible contributions or rolled over after-tax funds, that would be called basis. Basis is not eligible for a QHFD. This is a win-win result. Tax-free distributions from your HSA for qualified medical expenses and more of your IRA distributions are tax free.

Is QHFD Right for You?

QHFDs are not well known, and they are not for everyone. However, for some they can be a very valuable strategy. If you are thinking a QHFD may be a good option for you, consider consulting a knowledgeable tax or financial planner to discuss the specifics of your situation.

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