Funding HSA from TIRA via QHSAFD

Submitted by David Carrell on Thu, 2022-12-15 06:43

I know you can use a QHSAFD to fund an HSA using TIRA funds. I also know
a. you can make an HSA deposit in 2023 before tax filing deadline,
b. you can only use QHSAFD once in a lifetime
c. the QHSAFD funds move from the TIRA to HSA tax free and never previously taxed and then get spent on medical expenses so they are not taxed then. (So the $’s are small amount of income that never gets taxed)

Questions:
1. Can you “stack” two years of contributions into the one QHSAFD by doing it early in tax year? IOW, say in Jan 2023 could I transfer $17,050 ($7300 [2022] + $1000 [2022 catch up] + $7750 [2023] + $1000 [2023 catch up])

2. If I do a QHSAFD in 2023, can my spouse in say 2026 do it from her TIRA (into the same HSA)?

3. Since you have (as I understand it) up until the tax filing deadline to make a prior year contribution, is this deadline April 15th? or is it October since one can get automatic filing extension?



Submitted by David Mertz on Thu, 2022-12-15 15:51

  • The deadline for making an HSA funding distribution is year-end, *not* the due date of your tax return.  Any HSA funding distribution made in 2023 would be subject the 2023 HSA contribution limit.  To make an HSA funding distribution to fund a 2022 HSA contribution, the HSA funding distribution must be made by December 31, 2022.  See IRS Pub 590-B for more details.
  • The once-in-a-lifetime limitation applies individually, so your spouse can make an HSA funding distribution at any time independent of whether or not you have made an HSA funding distribution.
  • HSF funding distributions are generally an HSA funding option of last resort and normally should only be done if there is an immediate need to pay qualified medical expenses using funds currently in a traditional IRA.


Submitted by David Carrell on Thu, 2022-12-15 21:28

  • Thanks for the Pub 590-B cite. That does preclude the stacking option described.
  • Why would you say that this one in lifetime option is a option of last resort?
  • You are taking pretax $’s from the TIRA, moving them tax free into HSA, then spend (on medical expenses) from HSA tax free. In effect that nominally $8000 of income is never taxed. Plus once you are 65, you can spend from HSA on anything just as if it was paid from TIRA. Albeit, you will pay income tax on any non-medical expenses. But given the a) very broad definition of medical expenses and b) the fact that with proper documentation you can reimburse yourself for medical expenses from any time after you opened your HSA. 
  • It seems to me that post 65 at worst the HSA is no different than a TIRA and is “better” as long as the expense or reimbursement is a medical expense. So at worst the $’s get taxed as income post 65 and at best the $’s never get taxed.
  • Thanks for confirming the one time limit is per individual.


Submitted by William Tuttle on Thu, 2022-12-15 21:28

Just because you can do something, does not mean you should do something.

  • You should never do an IRA HSA funding distribution unless you have no other HSA contribution sources than other pre-tax retirement accounts subject to the 10% early withdrawal penalty.
  1. You are giving up the opportunity to expand your tax-advantaged contribution space with additional tax deferral.
  2. If you are >= age 59 1/2, you can simply take a pre-tax distribution and make a tax deductible HSA contribution. This will still have no effect on your AGI and avoids the 12-month testing period for the following year.
  • In the same vein:
    • Even though you can take penalty-free but taxable non-qualified HSA distributions >= age 65.
    • You should almost never do so, unless you have no other sources of pre-tax distributions that you wish to use. You will be giving up the future growth of likely tax-free qualified distributions. A significant majority of people will run out of HSA money, before they run out of time.


    Submitted by David Carrell on Thu, 2022-12-15 21:58

    • Sorry I failed to mention that yes I am over 59 1/2 so there is no penalty and no taxes paid on the funding from the TIRA. So if the HSA distributions are forever used for medical expenses (current year OR any prior time post HSA account), those $’s never get taxed.
    • Note that we are not currently drawing from either HSA or TIRAs. We are also keeping all necessary records that we can in the future take distributions to reimburse ourselves any medical expenses we may incur now. 
    • I agree that post age 65, even though you can take non-qualified distributions you generally should not.
    • I further agree that most people will run out of HSA $’s long before they run out of time, especially since there is effectively no time limit on reimbursing yourself for medical expenses (except the expense need be incurred after you open the HSA
    • For use the fact that we expect to run out of HSA $’s but (hopefully) have plenty of TIRA funds. So eventually, we are likely to need to spend some TIRA funds (and pay income tax on those) to pay health expenses. So eventually we expect to be paying medical expenses with $’s that generate income and associated tax. 
    • We are not funding HSA from TIRA to take a current HSA distribution. We are doing it so those $’s never generate income tax liability.
    • Basically your last statement “run out of HSA money, before they run out of time” is precisely why we are using the HSA to forever shelter that (in 2023) $8750 from income taxes.
    • I would agree that waiting to use the one time TIRA funding option makes sense because the annual contribution limit increases with inflation thus the longer one waits the more $’s one can shelter from income tax. For my particular case there are other (non-HSA, non-TIRA) reasons that we want to do this in ’23/’24. 


    Submitted by David Mertz on Thu, 2022-12-15 22:30

    • As spiritrider said, after age 59½ there is no justification for making an HSA funding distribution since you can take a taxable distribution from the traditional IRA, get a tax deduction for making a regular the HSA contribution and avoid the possibility of the HSA funding distribution becoming taxable and subject to penalty if you fail to complete the testing period.  You can still have the funds transferred directly from the traditional IRA to the HSA, but you would not want to report it as an HSA funding distribution.
    • If you use other funds to make the HSA contribution, you have the option to convert the funds from the traditional IRA to a Roth IRA where growth will be tax free once your Roth IRAs are qualified.


    Submitted by Alan - IRA critic on Thu, 2022-12-15 22:53

    One last question. OP asked about spouse doing a funding distribution from spouse’s IRA to OP’s HSA account. Language in Sec 408(d)(9)(B) appears to limit the distribution to the HSA of the spouse that owns the IRA. Correct?



    Submitted by David Mertz on Thu, 2022-12-15 23:33

    Correct.  The same individual must own the IRA and the HSA.



    Submitted by William Tuttle on Fri, 2022-12-16 00:10

    • An IRA HSA funding distribution should still be a last resort and only done if there is no other source of funds for the HSA contributions.
    • If you have taxable sources of the HSA contributions funds. You get both additional tax-advantaged space and a tax deduction.
    • An IRA HSA funding distribution gets you neither.
    • As mentioned if you do a Roth conversion of the same amount, the HSA deduction will offset the conversion taxable income.
    • You end up with the same $0 net effect on AGI, but gain two likely tax-free amounts.

     



    Submitted by David Carrell on Tue, 2022-12-20 17:31

    • Think I am up to speed TIRA to HSA question. The follow up by Spiritrider cleared things up. No active plans to fund HSA from TIRA.
    • I do have a follow up on the issue of spouse funding HSA (but not from TIRA). 
    • How is the ownership of the HSA defined? Can it be joint?
    • Originally the HSA was set up through  my (D) employer. I am now fully retired but in ’22 through a combination of prior yr bonus payment and some post retirement work (different employer), I have plenty of income to make HSA and IRA contributions. But in future years this is may not be the case but wife (A) is still actively employed. 
    • Assuming in future years, D does not have adequate (potentially no) income to fund the annual HSA or even allow it. A will still be working (self employed, currently a disregarded entity LLC but likely to convert to S corp) and she will have plenty of income to allow funding HSA. 
    • This HSA was originally set up by/though my prior employer. I have contacted adminstator and ‘added’ her to the account as an authorized “user”. So they will discuss account details with her and she has her own debit card.
    • Does this allow her to contribute to the HSA based on her income? 
    • If not, I see two alternate possibilities. 1) A can hire D as employee (which is quite likely anyway as I do work for the business already) or 2) A open her own HSA.
    • But it does seem odd that since we were always married and always filed taxes jointly during the entire existence of the HSA. Additionally, she is and always ways on the  high deductible insurance plan which allowed us to make the HSA contributions.
    • I do know that were we to divorce, A would be eligible to a portion (likely 50%) of the HSA balance.
    • I guess the real question is does A’s income (filing jointly) meet the income requirement to fund the exiting HSA? Or do we need to consider either making me (D) an employee with adequate income OR open a second HSA account OR can we title the existing account jointly?


    Submitted by David Mertz on Tue, 2022-12-20 21:18

    • HSAs are individual accounts, not joint accounts, but the funds can be used for the qualified medical expenses of either spouse and dependents.  If either spouse is covered by a family HDHP plan and both spouses are eligible to contribute their respective HSAs, the family contribution limit applies to the spouses’ contributions in aggregate.
    • Employment is not a requirement to be able make an HSA contribution.  Having income is not a requirement to be able to make an HSA contribution (although one of the benefits to making an HSA contribution is the deduction that reduces taxable income, so with no taxable income that benefit cannot be realized).
    • Making your spouse an authorized user of your HSA simply allows your spouse to make distributions from the HSA on your behalf.
    • In a divorce, the splitting of a HSA in whatever proportions are agreed upon in the settlement agreement would be done by a “transfer incident to divorce.”


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