IRA-to-HSA rollovers

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 IRA to an HSA and gift contributions. Here's what you need to know.

IRA-to-HSA rollovers

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 (aka a qualified HSA funding distribution) could offer tax-free use of a portion of your traditional IRA savings for eligible medical expenses. In a traditional IRA, withdrawals may be subject to income taxes, including during 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 Money in an HSA, on the other hand, can be withdrawn tax-free for qualified medical expenses.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, additional tax benefit. Roth IRA contributions have already been taxed, and you can withdraw your contributions (but not any investment earnings¹) 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 limits.

HSA contributions that are made through an IRA-to-HSA rollover aren't tax-deductible because money in a traditional IRA is pre-tax to begin with. Such a rollover would reduce the amount that you can contribute to an HSA for the given year, but wouldn't otherwise be expected to impact your tax situation.

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're covered under an individual HSA-eligible health plan and then become covered by a family HSA-eligible health plan in the same tax year, 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 uncommon, you may have to call your brokerage to complete the transaction. And you may want to consult with a tax or financial professional before conducting an IRA-to-HSA rollover to ensure it's 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 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 person giving the gift won't be able to deduct gift contributions on a tax return.

Also, depending on how much the person 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 won't 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. Depending on the type of health plan they're covered under, HSA owners and their spouses may be able to make contributions up to the family HSA contribution limit.

A bonus if both spouses are over 55 years old and have their own HSAs: they can each make catch-up contributions to their separate HSAs. HSAs are individually owned accounts and can't be jointly owned.

Funding your HSA when you're on a parent's or guardian's health plan

If you're over 18 (but under 26), on a parent's or guardian's HSA-eligible health plan, and not being counted as their dependent for tax purposes, you're eligible to contribute up to the annual family maximum to your own HSA. This doesn't 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. A parent could also fund the HSA of an eligible adult child, though the contributions wouldn't be tax-deductible for the parent or the child.