Inherited IRA to HSA
Can you do a one time transfer from an inherited IRA to fund an HSA?
In addition to the caveats posted by DMx, most but not all inherited IRAs have annual taxable beneficiary RMDs which need to be completed separately from any HSA funding distribution that would not satisfy the RMD. If so, the beneficiary RMD could be used to make the HSA contribution or to subsidize 401k contributions.
The client can simply take an ordinary distribution from the inherited IRA and use the funds for any purpose; there is no penalty on a distribution from an inherited IRA. The client could have the IRA custodian transfer the funds directly to the HSA, but it makes no sense to claim it on the tax return as a one-time HSA funding distribution instead of as an ordinary IRA distribution and an ordinary deductible HSA contribution. The deduction for the ordinary HSA contribution will offset an equal amount of income from the inherited IRA.
Although it makes no sense to do an HFD from an inherited IRA rather than making an ordinary distribution and an ordinary deductible HSA contribution, an HSA funding distribution would indeed satisfy some or all of the RMD for the inherited IRA. An HFD is not a rollover. See IRS Notice 2008-51.
Permalink Submitted by David Mertz on Wed, 2023-09-27 15:50
It makes no sense to do so. The only reason to do such a transfer is to avoid an early-distribution penalty and there is no early-distribution penalty for a distribution from an inherited IRA. Simply take the distribution from the inherited IRA, then make a deductible HSA contribution. This also avoids the possibility of failing to complete the testing period for an HSA funding distribution which would result in a 10% penalty on what would otherwise have been a penalty-free distribution from the inherited IRA..
Permalink Submitted by Sten Lindquist on Wed, 2023-09-27 16:30
This client wants to fund their HSA and 401(k) but lacks the funds to do both so the idea is to transfer from the inherited IRA to the HSA and fund the 401(k).