When you think about funding your health savings account (HSA), you may envision regular, automatic contributions from your paycheck. But there are lesser-known ways to save more for eligible health care costs, including rolling over money in an individual retirement account (IRA) to an HSA and gift contributions. Here is what you need to know.
Moving money from an IRA to an HSA comes with a host of rules and can typically only be done once in a taxpayer's lifetime. Why consider one? An IRA-to-HSA rollover could offer tax-free use of a portion of your traditional IRA savings for eligible medical expenses. Left in a traditional IRA, you'd likely have to pay income taxes on withdrawals, even in retirement. Money in an HSA, on the other hand, can be withdrawn tax-free for qualified medical expenses.
Curious about moving money from a Roth IRA to an HSA? This is allowed, but it may not provide much, if any, tax benefit. Roth IRA contributions have already been taxed, and you can withdraw your contributions (but not any investment earnings) anytime—and for any purpose, including to pay medical expenses—without paying taxes or penalties.
What to consider before doing an IRA-to-HSA rollover
Money moved as part of an IRA-to-HSA rollover counts toward the IRS's annual HSA contribution limit. That means in 2023, you can roll over $3,850 if you have coverage just for yourself and $7,750 if you have family coverage. This rises to $4,150 for self-only coverage and $8,300 for family coverage in 2024. Those 55 and older can contribute an additional $1,000 as a catch-up contribution. Unlike typical HSA contributions, these transferred dollars are not tax-deductible if you haven't made any payroll deductions.
IRA-to-HSA rollovers are also subject to the "testing period," which requires you to remain an eligible individual during the testing period. This includes remaining enrolled in an HSA-eligible health plan for 12 months post-rollover. If you change to an ineligible health plan during that time, you'll have to report the transferred amount on your tax return as income and pay an additional 10% penalty for an early withdrawal from your IRA.
There's another caveat to consider if you're approaching Medicare. If the IRA-to-HSA transfer was conducted less than 1 year prior to Medicare enrollment, contributions will be disqualified and fail the testing period. Those planning to enroll post-65 should be aware of Part A lookbacks that could disqualify contributions.
Also of note: If you are covered under an individual HSA-eligible health plan and then become covered by a family HSA-eligible health plan, you may be able to roll the difference in contribution limits between the 2 from an IRA into an HSA after your initial IRA-to-HSA rollover.
Because IRA-to-HSA transfers are relatively rare transactions, you may have to call your brokerage to complete the exchange. And you may want to consult with a tax or financial professional before conducting an IRA-to-HSA rollover to ensure it is done in a way that helps you avoid taxes and penalties.
Other little-known ways to fund your HSA
Gift contributions to an HSA
Anyone can fund an eligible individual's HSA—it doesn't have to only be the account holder. This means you could hypothetically receive gift contributions to your HSA. Keep in mind that gift contributions are still subject to the IRS's annual maximum HSA contribution for the year, and the giftor will not be able to deduct gift contributions on a tax return.
Also, depending on how much the giftor has given you for any reason during the year you receive the gift HSA contribution, it could be subject to gift tax rules. (The donor, not the recipient, typically pays gift tax.) Once the gift is in your HSA, that money can potentially grow tax-free just like any other contribution. And then you can withdraw it tax-free too, as long as it's used to pay for qualified medical expenses.
Spousal contributions to an HSA
If you're married and covered by an HSA-eligible health plan, you and your spouse can both contribute to your HSA. Although a spouse's contributions won't receive automatic payroll deductions like yours may, they can still be deducted from your taxes. These contributions will not be considered as a taxable gift and are positioned to benefit from tax-free growth if the contributed money is then used for qualified medical expenses. HSA owners and their spouses can make contributions up to the family HSA contribution limit of $7,750 for 2023, or $8,300 in 2024.
A bonus if both spouses are over 55 years old and have their own HSAs, they can each add $1,000 as a catch-up contribution, totaling $9,750 in 2023.
Funding your HSA when you're on a parent's or guardian's health plan
If you are over 18 (but under 26), on a parent's or guardian's health family HSA-eligible insurance, and not being counted as their dependent for tax purposes, you are eligible to contribute up to the annual family maximum to your own HSA. This does not prevent your parents or guardians from contributing up to the maximum to their own HSAs.
In other words, those eligible can potentially contribute almost double the amount they'd be able to if they were on an individual plan. This can position them to benefit as early as possible from years—or decades—of potentially tax-free growth of their HSA dollars, which can be helpful in retirement preparation.