Transfer IRA funds to an HSA?

[Hawkeye225]

Thinking about transferring my HSA and reading about HSA Bank tonight.  Do I read this correctly?  That I can make a one time HSA contribution (2017 for example) by transferring money from an IRA?  And with further research, it seems that this can be done with no penalty/tax free at any age if eligible for an HSA (if under 59 1/2 for example)?  Sounds too good to be true.

[East coast]

My understanding of things is that you are correct - it can be done once in a lifetime.

But based on your previous comments on the forum, you seem to have an income and thus I'd say it likely doesn't make sense.

[Hawkeye225]

East coast wrote:

My understanding of things is that you are correct – it can be done once in a lifetime.

But based on your previous comments on the forum, you seem to have an income and thus I’d say it likely doesn’t make sense.

Click to expand...

If I could withdraw $7750 tax free from traditional IRA, convert it to HSA with no tax penalty where it can grow tax free and have no taxes taken out when withdrawn (triple tax free), and save $2200 just by the withdrawal alone, why wouldn't I do it?  It's like a Roth conversion without having to pay taxes.

[East coast]

It might be right for you - you'd just need to run the numbers.

For most readers of this website that are still earning income and already max out their tax advantaged accounts anyways, it will not be the right move.

I can't really answer the "why wouldn't I do it" as no specifics were provided for your situation. But under a made up scenario where someone is fully maxing out all available tax advantaged accounts, they are reducing their available tax advantaged dollars by the $7750 (assuming family coverage + 55 or older) amount. You can't roll over that money over and make your contribution in the same year, since that rollover counts as your contribution. On the tail end of your income you are presumably paying taxes on that money at the highest marginal bracket instead of contributing new $$ in the HSA.

[Hawkeye225]

I must have a disconnect somewhere.  Let's say I am still earning income and maxing out 401k.  I don't see anywhere that a IRA rollover to an HSA would have any effect on the 2017 401k contribution.  If I made a TIRA contribution, it would not be deductible for 2017 and any money in a TIRA will be taxed as ordinary income when withdrawn, presumably RMD.  So why not move $7750 from TIRA that I already have to an HSA and never have to pay the taxes at withdrawal?

[spiritrider]

Yes, in isolation transferring IRA assets to  an HSA makes sense. You are simply moving assets that will be taxed on withdrawal to assets that most likely will be tax-free with qualified withdrawals. So, yes it is better than a Roth conversion, but that is not the only choice.

Now look at the better alternative outlined by East coast. Contribute the maximum HSA contribution by payroll deduction. The contribution is both income tax free and FICA tax free and the withdrawls likely tax free. You now have an additional $7750 in tax advantaged assets and still have the original IRA assets.

The only time the IRA -> HSA transfer might make sense is if you have absolutely no financial means to make the HSA contributions. In fact, I believe the only better contribution is to get a company match on a qualified plan.

One should always take advantage of an opportunity that an HSA presents. We go to great lengths to make backdoor Roth contributions rather than taxable investments. This is because even though they are both made with post-tax income, the Roth earnings are never taxed. Well, an HSA is even better, you still have the likely tax free earnings, but the money going in is not subject to income taxes and FICA taxes.

[Hawkeye225]

spiritrider wrote:

Yes, in isolation transferring IRA assets to  an HSA makes sense. You are simply moving assets that will be taxed on withdrawal to assets that most likely will be tax-free with qualified withdrawals. So, yes it is better than a Roth conversion, but that is not the only choice.

Now look at the better alternative outlined by East coast. Contribute the maximum HSA contribution by payroll deduction. The contribution is both income tax free and FICA tax free and the withdrawls likely tax free. You now have an additional $7750 in tax advantaged assets and still have the original IRA assets.

The only time the IRA -> HSA transfer might make sense is if you have absolutely no financial means to make the HSA contributions. In fact, I believe the only better contribution is to get a company match on a qualified plan.

One should always take advantage of an opportunity that an HSA presents. We go to great lengths to make backdoor Roth contributions rather than taxable investments. This is because even though they are both made with post-tax income, the Roth earnings are never taxed. Well, an HSA is even better, you still have the likely tax free earnings, but the money going in is not subject to income taxes and FICA taxes.

Click to expand...

Thanks spirit.  You helped with the disconnect issue I was having.  After some additional research, I do now see that an IRA transfer to an HSA cannot exceed the yearly HSA contribution amount.  I was originally thinking that both a regular HSA contribution and a transfer IRA to HSA contribution (one time event) could be made in a single year but that is not the case.  Thanks for the help.