IRA to HSA Rollover: The One-Time Transfer Rule

Short answer

A qualified HSA funding distribution may be made from your traditional IRA or Roth IRA to your HSA. This is a one-time transfer that moves money directly from your IRA trustee to your HSA trustee. The distribution isn't included in your income and isn't deductible, but it reduces the amount that can be contributed to your HSA that year. This is useful if you want to move retirement savings into a tax-free health account without triggering income tax.

You can't move money from your HSA back into an IRA. If you withdraw HSA money for non-medical expenses, you pay income tax plus a 20 percent additional tax if you're younger than 65. The reverse transfer doesn't exist under IRS rules.

The rule: one qualified HSA funding distribution in your lifetime

A qualified HSA funding distribution may be made from your traditional IRA or Roth IRA to your HSA. The distribution must be made directly by the trustee of the IRA to the trustee of the HSA. You can't withdraw the money yourself and then contribute it. The distribution isn't included in your income, isn't deductible, and reduces the amount that can be contributed to your HSA. You can generally make only one qualified HSA funding distribution during your lifetime.

This distribution can't be made from an ongoing SEP IRA or SIMPLE IRA. You can only roll over from a traditional IRA or a Roth IRA.

Edge cases and exceptions

The one-time rule has a limited exception related to your health coverage type. If you make a distribution during a month when you have self-only HDHP coverage, you can make another qualified HSA funding distribution in a later month in that tax year if you change to family HDHP coverage. This means you could have two transfers in the same year, but only if your coverage changed from self-only to family. For example, if you start the year with individual coverage and make a qualified HSA funding distribution in January, then enroll in family coverage in June, you could make a second qualified HSA funding distribution in June. Outside of this coverage-change scenario, the one-lifetime rule is absolute.

Not all IRA types qualify for this transfer. This distribution can't be made from an ongoing SEP IRA or SIMPLE IRA. Only traditional IRAs and Roth IRAs can fund an HSA this way. If you have a SEP or SIMPLE IRA, you'll need to work with your IRA custodian to understand your rollover options, which may include rolling to a traditional or Roth IRA first before transferring to the HSA.

There is a testing period that begins when you make the transfer and ends 12 months later. For a qualified HSA funding distribution, the testing period begins with the month in which the qualified HSA funding distribution is contributed and ends on the last day of the 12th month following that month. If you fail to remain an eligible individual during the testing period for reasons other than death or becoming disabled, you will have to include in income the qualified HSA funding distribution. This amount is also subject to a 10% additional tax. This means if you lose HSA eligibility during this 12-month window, you'll owe tax and penalty on the transferred amount. Situations that trigger loss of eligibility include enrolling in Medicare, signing up for a health plan that isn't HDHP-qualified, or being claimed as a dependent on someone else's tax return.

Worked example

Suppose you have a traditional IRA with $10,000 and you just enrolled in an HSA-qualified health plan with a $4,400 annual contribution limit. You ask your IRA trustee to make a qualified HSA funding distribution of $3,500 directly to your HSA trustee. The $3,500 moves tax-free and isn't reported as income on your tax return. Because you made a $3,500 qualified HSA funding distribution, your remaining HSA contribution room for the year becomes $4,400 minus $3,500, or $900. You can contribute only $900 more from your paycheck that year. You've used your one lifetime qualified HSA funding distribution.

If you stay HSA-eligible for the 12-month testing period that starts in the month of the transfer, the $3,500 stays in your HSA and can be used tax-free for qualified medical expenses with no deadline. Your IRA trustee reports the distribution to you and the IRS, and you show it on Form 8889: the qualified HSA funding distribution is shown on Form 8889 for the year in which the distribution is made. You're essentially converting retirement savings into health savings that can grow tax-free and be spent on medical expenses with no tax consequences.

Here's a scenario where the coverage exception matters. You make a qualified HSA funding distribution in January when you have self-only coverage. Six months later, you get married and switch to family HDHP coverage. Because you've changed coverage types in the same tax year, you're allowed to make a second qualified HSA funding distribution in that later month. Without this exception, you'd be limited to one transfer per lifetime, period.

No reverse transfer: HSA to IRA doesn't exist

IRS rules don't permit the reverse. You can't move money from your HSA into an IRA, and there's no HSA-to-IRA rollover. If you withdraw HSA funds for non-medical expenses before age 65, you must pay tax on the distribution and you may have to pay an additional 20% tax. Once you turn 65, HSA withdrawals for any purpose are taxable income but the 20 percent additional tax goes away.

Where reimbursement fits

After the transfer, your HSA balance pays for or reimburses qualified medical expenses without needing a letter of medical necessity. Doctors' visits, prescriptions, vision and dental care are all covered. Many health and wellness items like fitness classes and recovery equipment can be reimbursed with a letter from a clinician who names a diagnosed condition.

The HSA funding distribution is a one-time decision about how to transfer IRA funds to your HSA. It doesn't change how you pay for medical expenses or what counts as reimbursable. It's simply a way to move retirement savings from an IRA to an HSA before you're ready to use the money for health expenses.

Where Burst fits

A few things in this world are reimbursable only with a letter of medical necessity, such as a gym membership, massage therapy or a piece of fitness or recovery equipment tied to a diagnosed condition. For those, Burst writes the letter and files the claim for $35, and refunds it if no letter is issued or the claim is denied. See how a letter works.

Frequently asked questions

Can I make an HSA funding distribution from an inherited IRA?

Publication 969 names traditional and Roth IRAs as the source and rules out an ongoing SEP or SIMPLE IRA. It does not address inherited IRAs, so ask your IRA trustee before requesting the transfer.

What happens if I lose HSA eligibility during the 12-month testing period?

If you fail to remain an eligible individual during the testing period for reasons other than death or becoming disabled, you will have to include in income the qualified HSA funding distribution. This amount is also subject to a 10% additional tax. If you lose coverage because you age into Medicare or enroll in a non-HDHP, the distribution becomes taxable.

Do I report the HSA funding distribution on my taxes?

The qualified HSA funding distribution is shown on Form 8889 for the year it is made. Your IRA trustee will report the distribution to you and the IRS, and you'll report it on Form 8889 when you file your tax return.

Can I use the HSA funding distribution to exceed the annual HSA contribution limit?

No. The distribution isn't included in your income, isn't deductible, and reduces the amount that can be contributed to your HSA. If your annual limit is $4,400 and you make a $3,500 qualified HSA funding distribution, you can only contribute $900 more from your salary that year.

Can I move my Roth IRA to my HSA?

Yes. A qualified HSA funding distribution may be made from your traditional IRA or Roth IRA to your HSA. The rules are the same for both IRA types. The distribution is still tax-free and counts as your one lifetime qualified HSA funding distribution.

Keep reading: HSA contribution limits, HSA withdrawals after 65, HSA employer contributions, HSA catch-up contributions at 55, and all guides on this topic.

Sources

• IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans (Qualified HSA funding distribution definition, rules, one-time limit, IRA types, testing period, loss of eligibility tax and penalty, Form 8889 reporting)

• Form 8889 Instructions, Health Savings Accounts (Form 8889 reporting requirements for qualified HSA funding distributions)