Permalink Submitted by David Mertz on Thu, 2017-10-26 18:20
While you are permitted to make an HSA funding distribution from an inherited IRA, there is no need to do so since there is never a penalty for taking a distribution from an inherited IRA. You can simply take a distribution from the inherited IRA and separately make a deductible contribution to the HSA, offsetting the income from the inherited IRA distribution. (You can have the distribution from the inherited IRA sent directly to the HSA but you’ll still probably want to report it as a regular inherited IRA distribution and a separate HSA contribution.)
RMDs are not eligible for rollover. However, an HSA funding distribution from an inherited IRA can be used to satisfy some or all of the RMD required from an inherited IRA.
No distribution from an inherited IRA to a non-spouse beneficiary is eligible for rollover.
Contributing to an HSA with money that came from an IRA distribution is not a rollover.
Permalink Submitted by David Mertz on Thu, 2017-10-26 19:47
After reviewing IRS Notice 2008-51, it seems that an HSA funding distribution *is* permitted from an inherited IRA by the beneficiary for whom the inherited IRA is maintained; I’ve corrected my previous response. Still, there is generally no benefit to doing so over a regular distribution and subsequent HSA contribution. An HSA funding distribution begins a 12-month period in which you must remain an HSA-eligible individual, while making a regular contribution only incurs a testing period if you make the HSA contribution based on the last-month rule. https://www.irs.gov/irb/2008-25_IRB#NOT-2008-51
DMx, would it make sense to do the “HSA funding distribution” directly to the HSA so as not be taxed on the HSA funding distribution vs would be taxed on taking the IRA distritbution and then contributing remainder to HSA.
Permalink Submitted by David Mertz on Fri, 2017-10-27 15:11
Since a regular HSA contribution is an above-the-line deduction, either method will result in the same AGI and I’m not aware of any modified AGIs that would differ either. The only case I can think of where there would be an advantage to doing an HFD from an inherited IRA is if the inherited IRA had basis in nondeductible contributions. An HFD would result in the basis remaining in the inherited IRA to be applied to future distributions since only pre-tax money can be transferred by an HFD. If money is transferred in a way that permits it to be reported as an HFD, one can prepare the tax return both ways to see if there is any difference and, if not, report it as a distribution and separate HSA contribution.
Although it seems that the 10% penalty for failing to remain an eligible individual throughout the 12-month testing period is intended to recapture what would otherwise have been an early-distribution penalty if one had taken a regular IRA distribution and used the money to make a separate deductible HSA contribution, I don’t see any exception to the penalty in the case where the distribution from the IRA would not have been an early distribution. That could mean that there is some risk in doing an HFD in the case where the distribution from the IRA is not otherwise subject to penalty. However, if one did report an HFD and then failed to remain an eligible individual, I suspect that one could amend that tax return to not claim an HFD and to include the distribution and the HSA deduction instead, eliminating the penalty.
Also, an HFD is only permitted once in a person’s lifetime. If there is no tax advantage to doing the HFD over reporting the distribution and HSA contribution separately, reporting the distribution and HSA contribution separately would preserve the option of an HFD in the future.
Permalink Submitted by Alan - IRA critic on Fri, 2017-10-27 18:02
What is unique with the inherited IRA HFD is that it will be credited toward the inherited IRA RMD for the year. It is reported as a distribution and rollover on line 15 of Form 1040, but it is NOT technically a rollover because an RMD cannot be rolled over, however the end result still functions as a rollover of part or all of the RMD to an HSA and eliminates taxation of the RMD portion. But this process eliminates the deduction for a direct HSA contribution so is basically a trade off.
Permalink Submitted by David Mertz on Thu, 2017-10-26 18:20
Permalink Submitted by David Mertz on Thu, 2017-10-26 19:47
After reviewing IRS Notice 2008-51, it seems that an HSA funding distribution *is* permitted from an inherited IRA by the beneficiary for whom the inherited IRA is maintained; I’ve corrected my previous response. Still, there is generally no benefit to doing so over a regular distribution and subsequent HSA contribution. An HSA funding distribution begins a 12-month period in which you must remain an HSA-eligible individual, while making a regular contribution only incurs a testing period if you make the HSA contribution based on the last-month rule. https://www.irs.gov/irb/2008-25_IRB#NOT-2008-51
Permalink Submitted by [email protected] on Fri, 2017-10-27 14:19
DMx, would it make sense to do the “HSA funding distribution” directly to the HSA so as not be taxed on the HSA funding distribution vs would be taxed on taking the IRA distritbution and then contributing remainder to HSA.
Permalink Submitted by David Mertz on Fri, 2017-10-27 15:11
Permalink Submitted by [email protected] on Fri, 2017-10-27 16:01
thanks for the additional information. very helpful.
Permalink Submitted by Alan - IRA critic on Fri, 2017-10-27 18:02
What is unique with the inherited IRA HFD is that it will be credited toward the inherited IRA RMD for the year. It is reported as a distribution and rollover on line 15 of Form 1040, but it is NOT technically a rollover because an RMD cannot be rolled over, however the end result still functions as a rollover of part or all of the RMD to an HSA and eliminates taxation of the RMD portion. But this process eliminates the deduction for a direct HSA contribution so is basically a trade off.