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Filing Taxes Properly


Funding Medical Costs with a Rollover from a Traditional IRA to a Health Savings Account

Several types of tax-deferred retirement accounts can be rolled over to a different type of tax-deferred account. One such rollover is the conversion of an individual retirement account to a health savings account. Tax filers who anticipate a future need to pay increased medical expenses may be able to transfer IRA funds to an HSA before withdrawing the funds tax-free.

Contributions to a traditional IRA are not taxed up front, but distributions are normally taxed when eventually withdrawn. If the distribution is made early, an additional penalty may also be assessed. Unlike an IRA withdrawal, a distribution from an HSA is completely tax-free if used for qualified medical care.

High-deductible health plan

In order to perform a rollover to an HSA, you must have both a health savings account and a high-deductible health plan (HDHP). The financial account and the health-insurance policy work in conjunction. Funds from the HSA are withdrawn as needed to pay for the cost of medical care provided through the HDHP.

Rollover amount

The rollover of IRA funds to an HSA is referred to as a qualified HSA funding distribution. The amounts that can be rolled over are the same as the annual limitations for regular HSA contributions. For self-only coverage, the annual contribution limit in 2016 is $3,350. For family coverage, the maximum for 2016 is $6,650. Unlike with a regular HSA contribution, an individual does not receive a tax deduction for HSA funding received from an IRA.

If you are age 55 or older by the end of the year, you may roll over an additional $1,000. If the amount of IRA funds rolled over is less than the overall HSA contribution limit, regular contributions may be added to reach the overall annual limit.

Lifetime restriction

An important factor to consider is that a rollover of IRA funds to an HSA is generally allowed only once in a lifetime. The only exception to the once-per-lifetime rule is if you change from single coverage to family coverage within a calendar year. A second rollover is permitted in the same year to fund the greater contribution limit of family coverage.

As with most rollovers, the best option for moving the funds is a direct transfer from the IRA trustee to the HSA trustee. There is a testing period that applies to a qualified HSA funding distribution. A tax filer must remain eligible to participate in an HSA during the 12-month period following the rollover. Contact a financial planner from a company such as C & C Tax and Financial Services Inc for more information about tax-advantaged rollovers.

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Filing Taxes Properly

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