Funding HSA

L1: Funding HSAI”m currently taking a 72t distribution that I began in 2/06 at age 55. I retired from AT&T before reaching 55 and rolled over my 401K to Fidelity. When SBC purchased AT&T they switched health care benefits to a consumer driven health plan. This means I have a monthly health insurance premium of $374 ($4480 annual) that covers my wife and I. My out-of-pocket deductible is $2200 with a max out of pocket of $4125.
My question is can I take a qualified distribution from my wife”s 401K to cover the insurance premiums and out-of-pocket deductible to fund a health saving account (HSA) without getting hit with the 10% penalty? My wife turns 55 9/08. We were thinking of starting a 72t on her saving next year. If we could just taking the money out of her savings without a penaltyto cover the insurance premiums it would be a big helpfinancially for us.
I went to the IRS website and couldn”t find what type of dollars can be used fund an HSA.
Mark

2007-11-17 05:34, By: mk1mini, IP: [67.142.130.21]

L2: Funding HSAHello mark:
We may be able to get you part of the way there. IRC 72(t)(2)(B) provides for penalty free withdrawals from deferred accounts to the extent that your medical expenses (this means total medical expenses including premiums, out-of-pocket costs, drugs, etc.) exceeds 7.5% of adjusted gross income. Take a look at your Schedule A top section and see if you had a medical deduction last year.
The next issue is that most of the timedistributions from a 401(k) plan are not permitted until the employee separates from service.
TheBadger
wjstecker@wispertel.net
2007-11-17 07:08, By: TheBadger, IP: [72.42.67.29]

L2: Funding HSAThe Badger,
Thanks for the help. As hard as I tried to be accurate in outlining my question I didn”t mention that my wife was down sized in 05 and is not working. We left the 401k with her former employer (IBM) because they have many investment options in there plan, plus the expense is very low.
Can we rollover her 401k (approx. $140K) and take a 72t then put the money in a HSA? Is there a tax advantage to doing this? The health insurance is under my name and she is a dependent.
Mark
2007-11-17 08:55, By: mk1mini, IP: [67.142.130.13]

L2: Funding HSAMark, note that you cannot pay medical insurance premiums from your HSA account, unless they are under Cobra or are Medicare premiums.
As for making a contribution to an HSA, there are now two ways to do that:
1) The traditional way of making a contribution with taxable funds and then deducting the HSA contribution.
2) The new one time only qualified transfer from an IRA account to an HSA. In that case, you cannot also deduct the contribution because you never paid taxes on the IRA funds. I strongly recommend that you do not attempt this kind of transfer from an active 72t account, even though technically I do not believe it should bust the 72t because the HSA is NOT a retirement account, and the distribution is reported as a regular IRA distribution similar to a rollover. Still, this is all very new and no sense being the one to test the waters.
Therefore, if you want to fund the HSA, and your wife can also be the one to fund it because she is covered by the HDHP, she could transfer her 401k to an IRA, set up a proper 72t plan, and use some of the 72t distribution to fund her HSA account (no joint accounts), but she could fund for the family coverage contribution amount. Taxes would be due on the 72t distriburtion, but you would also receive a mostly offsetting deduction for the HSA contribution. I repeat however, that you cannot use the HSA funds to pay health insurance premiums except the ones in my opening statement. The HSA funds can be used for most other deductible medical expenses, and even over the counter meds similar to those covered by an FSA.
Her 72t plan would be totally separate and independent from your 72t plan. The HSA contribution would offset some of the 72t taxable income, but you would have to calculate the total costs for living expenses you will need for the term of each of your 72t accounts including the contributions to the HSA. Also, note that even if you later lose your HDHP plan, the HSA account remains available to use for medical expenses for the rest of your life. Distributions for other than qualified expenses are taxable and also carry an early withdrawal penalty up to age 65 (not 59.5).
If you have further questions, please advise.
2007-11-17 21:02, By: Alan S., IP: [24.116.165.60]

L2: Funding HSAAlan S.
Thank you so much for the information. Since starting my 72t distribution my health care costs have increased dramatically. An HSA will helpus manage our budget and give us a little tax benefit.
Mark
2007-11-18 04:43, By: mk1mini, IP: [67.142.130.15]

L2: Funding HSAYour HSA can actually provide you with some flexibility as well as tax breaks. For example, if your 72t distributions are falling short of what you need, you can pay your covered medical expenses out of the HSA account.
Conversely, if your 72t distributions provide more than enough to live on, you can then pay your medical expenses ouf of the 72t cash distributions. SInce these funds are taxable, you can also potentially deduct these costs in excess of 7.5% of AGI. By not using your HSA funds, they continue to grow potentially tax free. The HSA can therefore double as a tax advantaged savings account. No form of IRA has BOTH a deduction for contributions AND tax free distributions for qualified expenses. You can also take HSA distributions long after you no longer have your HDHP insurance coverage, you just can no longer contribute to the HSA.2007-11-18 18:02, By: Alan S., IP: [24.116.165.60]