What are the rules regarding the rollover of IRA funds into an HSA?

Many people refer to this as an “IRA rollover”, but technically a rollover is when the individual receives the custody of the funds and they must redeposit the funds to a qualified custodian within 60 days. This type of rollover is not allowed. Instead, the IRS requires IRA funds to be processed as a trustee-to-trustee transfer and refers to these transfers as Qualified HSA Funding Distributions. An individual is allowed a once per lifetime, tax-free Qualified HSA Funding Distribution of IRA funds into an HSA if certain conditions are satisfied:

  • The transfer of funds from the IRA to HSA must be made in a direct trustee-to-trustee transfer.
  • The individual must be covered by a HDHP and remain eligible for 12 months after the IRA transfer to the HSA. If they are not eligible for 12 months after the distribution, the funds transferred will be treated as taxable income and subject to a 10 percent excise tax.
  • Only Traditional or Roth IRAs can be rolled over into an HSA.
  • The amount of the IRA distribution to the HSA is subject to the maximum annual contribution limits. This means amounts transferred from an IRA, plus the employer contributions, plus an employee’s contributions, will all apply against the maximum annual contribution limit. The individual HSA accountholder must ensure that the total of all these do not exceed the maximum annual contribution limits. However, if they make a distribution during a month when they have self-only (individual) HDHP coverage, they can make another qualified HSA funding distribution in a later month in that tax year if they change to family HDHP coverage.
  • The maximum IRA funds distribution depends on the HDHP coverage (self-only or family) the individual has on the first day of the month in which the contribution is made and their age as of the end of the tax year. The IRA funds distribution is not included in their income, is not deductible and reduces the amount that can be contributed to their HSA.

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HSAs are available to help pay for current qualified medical expenses as well as to save for future expenses, all in a tax-exempt account.

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