One time IRA to HSA Transfer (timing rules)

Submitted by [email protected] on Tue, 2008-03-18 04:53

Hello,
As a result of the “Economic Stimulus Rebate Plan” I think I have an opportunity to make use of this IRA-HSA transfer strategy.

My wife and I are covered by a HDHP family heallth plan and have a family HSA account. In 2008 I’ll be joining Medicare, so the HDHP plan will then become an individual plan for her, and a new HSA must be opened in her name only. (Thank some idiot congressman for that complication..!)

However, due to the “stimulus plan” rebate of our entire IRS liability for 2007, we will not need the tax deduction of my wife’s $800 “catch-up” contribution to her HSA. So I would like to use the IRA – HSA transfer to do it, as that gets $800 out of an IRA tax-free.

So here’s the question: Can I use the 2007 “catch up” HSA contribution allowance to cover the transfer of money from an existing TIRA into a NEW HSA account opened in February 2008. Transfer will be done prior to filing 2007 1040, which will not happen until 2nd week in April…?

(As trivial as $800 may seem, we will never again have the opportunity to use that one-time transfer, as we will need the HSA contribution deductions in 2008 and future years… so might as well do it…)

Thanks….!

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Permalink Submitted by [email protected] on Tue, 2008-03-18 05:07

Re the IRA to HSA transfer…

I believe this is processed identical to an IRA tp IRA transfer, and not a “rollover”. Consequently should not generate a 1099 form from the IRS.

Is this true…?

Thanks…!

Permalink Submitted by Alan Spross on Tue, 2008-03-18 06:02

No, you will get a 1099R even though this is processed as a transfer. Therefore, you will have to report it on line 15a of Form 1040, enter -0- on 15b and show “HFD” next to 15b. This is described in the 1040 booklet on p 21.

I will get to your first post tomorrow, want to check out if your Medicare qualification will affect the HSA testing period requirement for the transfer.

Permalink Submitted by [email protected] on Wed, 2008-03-19 03:01

Thanks for the reference to page 21 of the 1040 instructions. I missed that. It does answer the 1099 question. However, it raises another, inasmuch as I’m not sure of their meaning of “otherwise taxable income” in this statement:

“If your IRA includes nondeductible contributions, the HFD is first considered to be paid out of “otherwise taxable income”.”

In this case, my wife’s IRA does contain $2000 of nondeductible contributions. I would assume, since that has already been taxed, that the transfer would come entirely out of the OTHER portion of the IRA that has NOT previously been taxed. So the form 8606 “basis” of the IRA will remain at $2000 after the transfer, and no messing around with a 8606 form would be necessary. Do you agree…?

If so, that leaves only the timing of the transfer as a possibe problem. In other words, I want to use up the $800 of 2007 catch-up, NOT any of the 2008 contribution allowance.

Thanks…!

Permalink Submitted by Alan Spross on Wed, 2008-03-19 05:01

You are correct. Your 8606 IRA basis will remain unchanged. This HSA transfer is handled in many respects like the QCD from an IRA with respect to basis and 1099R reporting.
Still need to look into the rest of your initial post.

Permalink Submitted by Alan Spross on Wed, 2008-03-19 06:07

It appears your wife could make the $800 catchup up contribution for 2007 to her new HSA account established in Feb 08. This can be her one time IRA transfer to HSA. She must then remain covered by an HDHP for 12 more months or the entire 800 becomes an excess contribution. Therefore I assume she will not be enrolling in Medicare during that period. The former HSA account was probably in your name and they cannot be joint, but I assume there is at least $800 remaining of eligible 2007 contributions.

Permalink Submitted by [email protected] on Thu, 2008-03-20 02:39

Yes, thank you very much, alan. You have described exactly what I was hoping to do.

I’ll go for it….