Tranfering money to an HSA
L1: Tranfering money to an HSA
I recently setup a Traditional IRA account that I am taking 72t distributions from. I have taken my 2012 distribution from the account in one lump sum. I have read that I can transfere money from an IRA to a Health Savings Account. I have an existing HSA
that is close to my deductable limit that I would like to add money to. Can I take money out of the TIRA to fund the Health Savings Account without any penalty to the 72t distribution or the transfere of money to the HSA? I originally funded the HSA out of
my own pocket, so this transfere would be the first time I funded the account with IRA money.
“The Tax Relief and Health Care Act of 2006 included provisions that would take affect on January 1, 2007, and one of these provisions did include transferring funds into an HSA account from an IRA. The maximum contribution amount was also increased to $2,850
for a single person and $5,650 for family coverage. You may now make a one time transfer from your IRA into a Health Savings Account, but you will need to open an HSA in order to do this. Deductions may not be taken directly from your IRA in order to pay for
medical expenses; they need to come from the HSA account. One additional change, that is probably the most important, is that now partial year enrollees are able to contribute the full annual maimum into their Health Savings Account. This will encourage people
to enroll in high-deductible health plans during the middle or end of the year in order to obtain the tax benefits. The initial purpose of Health Savings Account legislation by the federal government was to encourage persons to purchase health insurance, and
providing them with more flexible guidelines will hopefully make these HSA compatible health plans more attractive.”
2012-01-10 21:50, By: kane, IP: [188.8.131.52]
L2: Tranfering money to an HSA
I think yours is the first question on qualified HSA funding distributions for 72t plan participants. I also think that the IRS has not addressed this because these transfers were not around when RR 2002-62 was released.
Technically, since an HSA is clearly not another “retirement plan” of the kind referred to in 2002-62 and the way it is written would not be construed to be a retirement plan, I think you should be allowed to make this transfer
without busting your plan.
Now I will tell you why I think you should not try it. This transfer is a fully reportable transfer and will be included in your 1099R. You would then have to show the transfer on line 15 of Form 1040 as a rollover amount. While
that would leave your 72t distribution amount unchanged and you clearly have not rolled over part of your 72t distribution, it will likely trigger an IRS inquiry into the reported rollover at which time you would have to convince the IRS that THIS unique type
of rollover should be allowed and that an HSA is not a retirement plan. However, it could be two years or more down the road before the IRS sends youa letter and if they do not agree another two years of retroactive penalty and interest. For the small amount
allowed and considering that it is only a one time transaction and effectively just replaces your normal HSA contribution, I don’t think it is worth it.
If you make your HSA contribution out of your actual 72t plan distribution which you already took out, you will get a tax deduction whereas you will not for the IRA transfer. That will reduce your taxes this year which presumably
will also be paid from your 72t distributions, so your out of pocket cost is the after tax figure. You are a little out of pocket this year but will get that back as you take tax free HSA distributions to pay for medical costs.
2012-01-10 23:30, By: Alan S., IP: [184.108.40.206]
L3: Tranfering money to an HSA
I have a separate TIRA that is not associated with the TIRA with the 72t distribution. Would it raise a red flag with the IRS if I used that money from the separate TIRA to transfere money to the HSA account or use that money to pay my health insurance bill?
2012-01-11 00:13, By: kane, IP: [220.127.116.11]
L4: Tranfering money to an HSA
No, that would be OK. Anything you do with an IRA that is not part of your 72t plan does not affect the 72t plan in any way. You could make the qualified HSA funding distribution from this other IRA without any problems.
Remember that there are testing period requirements that you have adequate HDHP insurance coverage in force to justify the funding distribution. There will be a 1099R for each IRA account, but the IRS should only be looking at
the 1099R that shows the account number of the IRA you are using for your 72t plan.
If you have any basis in your IRAs as shown on Form 8606, part of your 72t distribution is tax free. Further, the HSA transfer is deemed to be composed fully of pre tax dollars and would not reduceany non deductible balance
left in the TIRAs.
2012-01-11 00:59, By: Alan S., IP: [18.104.22.168]