What You Need to Know
- An IRA-to-HSA rollover can help a client looking for a tax-preferred way to cover a large medical expense.
- This move can be done only once in a lifetime.
- In 2022, rollovers are limited to $3,650 for a client with individual HDHP coverage or $7,300 for those with family coverage
Health savings accounts provide a powerful option for taxpayers looking for tax-preferred ways to fund health care expenses — both today and in the future.
The client funds the HSA with pretax dollars to reduce taxable income, and, if the HSA funds are used to cover health care expenses, the withdrawal is also tax-free.
However, many clients may not have the cash to contribute to the HSA in today’s inflationary environment. They may also be unaware of a little-known HSA funding rule that allows the client to make a rollover from the client’s IRA into the HSA.
Still, the rules for IRA-to-HSA rollovers are detailed and the strategy isn’t ideal for every client. Because of that, as always, it’s important for every client to be aware of the pros and cons of the strategy before executing the rollover.
IRA-to-HSA Rollovers: The Basics
First and foremost, clients should understand that they are only permitted to execute an IRA-to-HSA rollover once in a lifetime. That’s true regardless of whether the client continues to be eligible to fund an HSA from other sources of funding.
The most the client can roll over in any given year is the annual HSA contribution limit. In 2022, those limits are $3,650 for self-only coverage and $7,300 for clients with family high-deductible health plan coverage (in 2023, those limits increase to $3,850 and $7,750). Clients who have reached age 55 are entitled to make an additional $1,000 catch-up contribution.
Further, clients should know that the strategy is only available for deductible IRA funds. That means clients can’t roll over after-tax or nondeductible IRA contributions, only IRA funds contributed with pretax dollars. The strategy also isn’t available for 401(k)s — although the client could consider rolling 401(k) funds into an IRA before rolling the funds into the HSA.