IRA to HSA

Submitted by John Jawor on Mon, 2023-06-26 18:02

New client retired, says she can ” transfer” from her IRA to her HSA. She says she is capped at how much annually she can contribute. Also wonders if she can wait until next tax year, that amount would be increased that she can contribute to HSA.
She says that she has one year from termination of her employment to fund, after that she cannot do and it must be a 1 time transfer. Is this based on plan or IRS guidelines?

I cant seem to find a resource that address this specific case.

thanks in advance



Submitted by Alan - IRA critic on Mon, 2023-06-26 19:54

One time qualifed HSA funding distributions are described on p 15-16 of Pub 590 B linked below. Note that the transfer cannot exceed the amount that client would otherwise have been able to make to the HSA for the year, but that amount will increase about 8% for 2024. To use this higher limit, the transfer must take place in 2024 by year end. Therefore, if she cannot fund a regular HSA contribution, she might consider the one time transfer. Of course, that depletes her IRA balance. Finally, note that transfer does not generate tax or a deduction but a regular HSA contribution would qualify for a deduction.

Submitted by David Mertz on Mon, 2023-06-26 20:25

  • An HSA Funding Distribution is only permitted to be made from an IRA is limited to one per the individual’s lifetime.  However, it goes against the current-year HSA contribution limit so the HFD can only be done during the a year that the individual is eligible to contribute to an HSA.
  • The only reason that client might think that there is a timing restriction would be if the client will be ineligible to contribute to an HSA for 2024.  However, failure to remain an eligible individual during the 12-month period beginning on the first of the month in which the HFD is done results in the HFD becoming subject to an recapture of the early-distribution penalty that the HFD was intended to avoid, so it defeats the purpose of an HFD.
  • If the client is over age 59½, which seems plausible given that the client is retiring, it makes no sense to make an HSA Funding Distribution from an IRA since its only purpose is to fund the HSA using funds from the IRA without incurring any early-distribution penalty.  If the client is not subject to an early-distribution penalty, it would be far better to take a taxable distribution from the IRA and make a deductible contribution to the HSA.  AGI would be the same and there is no HFD testing period to worry about.
  • Details about HFDs are also in IRS Pub 969.

Submitted by John Jawor on Mon, 2023-07-03 20:27

When would she be deemed ineligible for the Ira transfer?  She has 750k in Ira so the Ira to hsa would not delplete her Ira. Not sure what that bullet point referred to.  She thinks she has a tear after termination to do the one time transfer so if she waits until Jan 24 she can take advantage of the 8% increase. Correct?  She is using hsa for cobra payments until 65. (18 months).  as usual Ty so much for the guidance!    

Submitted by David Mertz on Mon, 2023-07-03 23:14

  • One must be eligible to contribute to a HSA for the year that an HFD is made and the distribution must be made in that year.  She would be ineligible to make an HFD anytime she would be ineligible to make that same contribution as a regular deductible HSA contribution.  Another way to look at it is that making the contribution as an HFD just eliminates the early-distribution penalty on the IRA distribution (provided the HFD testing period is completed, see below), otherwise there is no difference between an HFD and making a deductible HSA contribution during the year using funds obtained with an IRA distribution.
  • If the health insurance she has under COBRA makes her eligible to contribute to an HSA for all of 2024 (and she does not have any disqualifying coverage such as Medicare), she can make and HFD of the full 2024 contribution limit anytime in 2024.  There is no employment requirement to make an HSA contribution, so, with respect to making an HSA contribution, including one made via an HFD, it doesn’t matter when she retires.  There is no one-year deadline measured from anything.
  • However, there is an area of concern.  If she makes an HFD less than a year before becoming ineligible to make an HSA contribution, she will fail the HFD testing period and will owe a 10% recapture of the early-distribution penalty that would have resulted from the IRA distribution had it not been paid to the HSA.  To make a HFD on January 24, 2024 she will have to remain eligible to contribute to an HSA through January 2025.  Since COBRA will cover her for only 18 months, if that coverage ends at the end of 2024, she will fail to complete the testing period unless she obtains an HDHP plan that covers her for at least January 2025 and she has no disqualifying coverage until February 2025.  If she has concerns about remaining HSA eligible through January 2025, she could make an HFD in 2023 and make a regular HSA contribution in 2024 (assuming that she has the funds to do so).  It’s this that may create a contribution deadline relative to the retirement date, but that would generally be a six-month deadline (because the COBRA is only for one year plus six months), not a one-year deadline.

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