Qualified HSA Funding Distribution from Roth IRA
1.) A Qualified HSA Funding Distribution from a Roth IRA to open an HSA is made before the 5 years have passed since the Roth was established and also before age 59 1/2. Is this taxable and/or subject to a 10% penalty?
Note: Roth IRA was originally established by a partial conversion of a traditional IRA which included some non-deductible contributions (basis).
2.) A Qualified HSA Fund Distribution is made into a HSA Individual High Deductible Health Plan (HDHP) and then you are eligible for & change to an Employer’s Group HDHP before the end of the 12 month testing period. Does this disqualify your HSA eligibilty and subject you to tax and/or penalties?
Permalink Submitted by Alan Spross on Fri, 2012-03-23 21:42
This is very rare, since what few HSA funding distributions have been done were mostly all from traditional IRAs. Doing this from a Roth IRA just takes money that will be tax free and moves it to another account that will also be tax free if distributions are qualified. There is no additional deduction allowed.
From either IRA type, the (one time) HSA funding distribution is a non reportable tax free transfer, not subject to tax or penalty. However, if the taxpayer fails to meet the qualifying requirements during a testing period of 13 months there will be a tax under Form 8889 on which the taxpayer must report the HSA funding contribution.
There is no provision for the Roth IRA basis to change as a result of this transfer, so the Roth IRA still has the same amount deemed to come from regular or conversion contributions. The HSA transfer essentially reduces present or future Roth earnings by the amount of the transfer.
The change from individual to employer HDHP should not affect this unless there was a gap in coverage. There might also be issues if the HDHP coverage changed from family to individual.