HSA funding via IRA transfer second time from spouse?

[ArkTinkerer]

We funded our family policy HSA this year with a one time transfer from my IRA. My wife is still working (part time, no employer health insurance) so I was wondering if we could do a transfer next year from her IRA? Would save a bit of coin and possibly more than this year if the limits get doubled per GOP plan. (Not that I think it has the chances of the proverbial snoball in hell of passing!)

 

[bingybear]

I'm not sure, but I think you can only transfer into your own HSA. That is not to say she could not open her own HSA and fund it.

Personally I get fund my HSA with after tax dollars. This allows you to move more $ to tax preferential treatment. When you move from IRA to HSA you gain the use of the $ tax free for health care, but you don't gain any more $ with tax preferential treatment. Using after tax $ gives you both tax preferential treatment and tax free use for medical expenses. It also lets you subtract the HSA contribution off your income --thus not really after tax $ in the end.

But then some only have their IRAs to fund an HSA.

One thing to remember, you don't have a family HSA presently. HSAs are owned by individuals. If you do HSA catch up provisons (55 and older), these must be deposited into each owners HSA. Your wife can not put her catch up contribution into your HSA or visa versa.

 

[thefinancebuff]

We funded our family policy HSA this year with a one time transfer from my IRA.

You gain nothing from doing this because you lose the tax deduction from contributing normally. In effect you are just paying taxes prematurely on your IRA withdrawal.

 

[ArkTinkerer]

You gain nothing from doing this because you lose the tax deduction from contributing normally. In effect you are just paying taxes prematurely on your IRA withdrawal.

Maybe, but not a certainty. Wife's income is not enough to cover our expenses 100% so we have to pull some money from somewhere. By doing the transfer that need is covered or at least the extra funds can come from stock sales (long term capital gains at either zero or lower tax rate). There is some chance she will convert to full time in which case we will get healthcare thru her employment and not be eligible for the HSA anymore. But there is a potential large payment for some consulting work I did that may make your statement correct.

But now I am confused--We have a family insurance policy. We opened one HSA under my name but they have each family members data. I transferred the full amount allowed for a family into the account from my IRA. Adviser said this was proper. I can understand DW not being able to transfer into the account from her IRA but we can certainly pay her and our children's expenses from that account.

 

[Fedup]

I thought you get one time tax free transfer from IRA to HSA. Something like $125k.

 

[audreyh1]

I thought you get one time tax free transfer from IRA to HSA. Something like $125k.

I wish! But no:

The amount that can be transferred cannot exceed the amount you are eligible to contribute to your HSA for the year.

And I wouldn't do the one time transfer anyway because I would lose out on the tax deduction.

I think the IRA transfer would be for someone who didn't have the taxable savings to contribute to an HSA, but did have the funds in an IRA and needed them to cover some medical expenses.

 

[bingybear]

Maybe, but not a certainty. Wife's income is not enough to cover our expenses 100% so we have to pull some money from somewhere. By doing the transfer that need is covered or at least the extra funds can come from stock sales (long term capital gains at either zero or lower tax rate). There is some chance she will convert to full time in which case we will get healthcare thru her employment and not be eligible for the HSA anymore. But there is a potential large payment for some consulting work I did that may make your statement correct.

But now I am confused--We have a family insurance policy. We opened one HSA under my name but they have each family members data. I transferred the full amount allowed for a family into the account from my IRA. Adviser said this was proper. I can understand DW not being able to transfer into the account from her IRA but we can certainly pay her and our children's expenses from that account.

So much information here. Without knowing a lot more about your situation it is hard to provide proper suggestions. In general what was said is correct if you don't plan on using the HSA dollars right away. Depending upon your situation, it may be better to sell some stock than do the IRA to HSA since you could invest the $ in you HSA if your HSA custodian allows it. Note the may. No one can estimate without full knowledge of what is going on in your life.
You note if you wife goes to full time and gets heath insurance thru the employer you would not be eligible for the HSA. This may or may not be true. Many employers offer HSA compatible insurance. It is not employer sponsored insurance but insurance compatibility to HSA requirements the that effect the ability to contribute. If your wife goes full time and gets non-compliant insurance and you did your IRA-> HSA transfer was for 2017, then you might want to check out the testing period on this link.

I don't think your wife can do a IRA to your HSA conversion. Every thing I see is from your IRA to your HSA. But I see nothing that would stop you from covering your wife and children's medical expenses from your account.

 

[ArkTinkerer]

So much information here. Without knowing a lot more about your situation it is hard to provide proper suggestions. In general what was said is correct if you don't plan on using the HSA dollars right away. Depending upon your situation, it may be better to sell some stock than do the IRA to HSA since you could invest the $ in you HSA if your HSA custodian allows it. Note the may. No one can estimate without full knowledge of what is going on in your life.
You note if you wife goes to full time and gets heath insurance thru the employer you would not be eligible for the HSA. This may or may not be true. Many employers offer HSA compatible insurance. It is not employer sponsored insurance but insurance compatibility to HSA requirements the that effect the ability to contribute. If your wife goes full time and gets non-compliant insurance and you did your IRA-> HSA transfer was for 2017, then you might want to check out the testing period on this link.

I don't think your wife can do a IRA to your HSA conversion. Every thing I see is from your IRA to your HSA. But I see nothing that would stop you from covering your wife and children's medical expenses from your account.

Great link! Thank you! Does say that an IRA to HSA transfer is not subject to the testing period. So there is that. Still don't see an absolute statement on separate transfers, from married couples in different years but it sounds like that may be the case. But we could open a second account next year in her name via transfer? I will inquire further.

 

[thefinancebuff]

I think the IRA transfer would be for someone who didn't have the taxable savings to contribute to an HSA, but did have the funds in an IRA and needed them to cover some medical expenses.

If they are already 59-1/2 they can just take a regular IRA withdrawal and contribute it to the HSA normally. They can do it more than once and there is no testing period. For those under 59-1/2, lowering the unmatched contribution to 401k would have the same effect.

 

[ArkTinkerer]

If they are already 59-1/2 they can just take a regular IRA withdrawal and contribute it to the HSA normally. They can do it more than once and there is no testing period. For those under 59-1/2, lowering the unmatched contribution to 401k would have the same effect.

Retired @52. Since we use DW modest income and a bit more there are no 401K contributions (or 403B in her case).

Biggest issues for me have been the uncertainty in income. Rental properties are pretty steady but we do get the big repair items or renter who bails in the night from time to time. But getting a chunk from consulting causes havoc with planning. Occasionally I can push/pull it from one year to the next but pushing it out has risks of non-payment (usually I deal with small firms so if the owner dies chance of payment is slim). Paying taxes is a burden but it beats not getting paid. Still, I have to admit I do much of that sort of work for non-financial benefits these days. We're building probably the last utility trailer I will ever own. Will outlive me and probably my boys!

 

[marko]

You gain nothing from doing this because you lose the tax deduction from contributing normally. In effect you are just paying taxes prematurely on your IRA withdrawal.

My understanding is different: AFAIK you're allowed a one time transfer from your IRA to an HSA with no tax hit. Then you can spend the HSA funds as you need. You do not get the deduction but you also don't pay a tax.

It eliminates the two step process of withdrawing from the IRA and then getting the tax deduction of going into the HSA.

More details here: http://www.kiplinger.com/article/insurance/T027-C001-S003-rules-for-ira-to-hsa-rollovers.html

 

[thefinancebuff]

My understanding is different: AFAIK you're allowed a one time transfer from your IRA to an HSA with no tax hit. Then you can spend the HSA funds as you need. You do not get the deduction but you also don't pay a tax.

It eliminates the two step process of withdrawing from the IRA and then getting the tax deduction of going into the HSA.

Compared to using outside money (savings account, sell stocks/bonds), because you lose the deduction, it has the same effect as paying taxes on the IRA withdrawal. Compared to the 2-step process, you are limited to doing it only once while gaining nothing, and you unnecessarily sign up for a 12-month testing period, which can potentially come back and bite you. See IRA to HSA Rollover: Testing Period not Met. Arguably the special funding distribution is also more complicated for the custodian to process and more error prone than a straight withdrawal. You keep it very simple when you just use outside money and you get the deduction, which lowers you AGI, lowers your taxes, increases your ACA subsidy, creates more room for tax free capital gains etc. etc.

 

[marko]

Compared to using outside money (savings account, sell stocks/bonds), because you lose the deduction, it has the same effect as paying taxes on the IRA withdrawal..

I understand the benefits of using cash on hand, but I still don't see how I'm paying taxes on the withdrawal.

I got a deduction when I put the money in the IRA. I roll it into the HSA
Now I'm withdrawing for a medical expense tax free. From what I see, I never paid tax on it.

Our med expenses are small so we never meet the deduction amount.

All things considered, if one didn't have the $7500 cash to deposit, withdrawing from the IRA, paying tax and getting the HSA deduction just seems more complicated.

 

[bingybear]

Compared to using outside money (savings account, sell stocks/bonds), because you lose the deduction, it has the same effect as paying taxes on the IRA withdrawal. Compared to the 2-step process, you are limited to doing it only once while gaining nothing, and you unnecessarily sign up for a 12-month testing period, which can potentially come back and bite you. See IRA to HSA Rollover: Testing Period not Met. Arguably the special funding distribution is also more complicated for the custodian to process and more error prone than a straight withdrawal. You keep it very simple when you just use outside money and you get the deduction, which lowers you AGI, lowers your taxes, increases your ACA subsidy, creates more room for tax free capital gains etc. etc.

I believe the OP noted he did not have the free cash flow to fund his HSA from normal cash. So that would make the IRA -> HSA a good possibility. Also, if one were under 59.5, the 2 step process would cost you more with the penalty.

 

[thefinancebuff]

I understand the benefits of using cash on hand, but I still don't see how I'm paying taxes on the withdrawal.

I got a deduction when I put the money in the IRA. I roll it into the HSA
Now I'm withdrawing for a medical expense tax free. From what I see, I never paid tax on it.

If your income is $50k before all this and you put $5k in the HSA from outside money, your AGI is now $45k because you get a deduction for contributing to HSA. If you did the IRA to HSA transfer you don't get that deduction. Your income is now $50k. There, you just raised your AGI by $5k from what it otherwise would be by doing the transfer, effectively paying taxes on that $5k transfer.

 

[thefinancebuff]

I believe the OP noted he did not have the free cash flow to fund his HSA from normal cash. So that would make the IRA -> HSA a good possibility. Also, if one were under 59.5, the 2 step process would cost you more with the penalty.

Not having the free cash flow from jobs doesn't mean not having enough assets in taxable accounts to sell. When one is under 59-1/2, just sell some more from a taxable account. Not 100% of it will be capital gains. Long term capital gains are taxed at a lower rate, possibly 0%. You get to keep the HSA deduction.

 

[marko]

Not having the free cash flow from jobs doesn't mean not having enough assets in taxable accounts to sell. When one is under 59-1/2, just sell some more from a taxable account. Not 100% of it will be capital gains. Long term capital gains are taxed at a lower rate, possibly 0%. You get to keep the HSA deduction.

I suspect we're dealing with theoretical situations outside of the OPs original question at this point.

One thing I've learned on this forum is that some financial situations apply to some people and others never will. The old "YMMV" thing.

 

[ArkTinkerer]

My understanding is different: AFAIK you're allowed a one time transfer from your IRA to an HSA with no tax hit. Then you can spend the HSA funds as you need. You do not get the deduction but you also don't pay a tax.

It eliminates the two step process of withdrawing from the IRA and then getting the tax deduction of going into the HSA.

More details here: Rules for IRA to HSA Rollovers

When I did the transfer, it wasn't even on the radar of getting a payment from consulting. In fact, the biggest concern was that DW would convert to full time and get health care from employment--killing the chance of HSA transfer from IRA. We have most of our retirement in tax deferred accounts and the biggest problem I see going forward is getting the funds out with the smallest tax/benefits impact. Financial models say we can pull plenty of money from the accounts but the taxes will play a major role in the amount we can actually spend. Trying to do a Roth ladder as that seems the most flexible from year to year. The HSA transfer allowed us to get the funds tax free. If pulled from our relatively small non-retirement funds I would be looking to replace it fairly quickly to maintain a cash safety fund.

Still awaiting word from an official source or pointer to actual IRS text that says the DW can't do the same transfer I just did on my account though perhaps to another HSA in her name some time in the future.

 

[ArkTinkerer]

Just to make it somewhat clearer-- the larger payment from consulting would kick long term capital gains into effect on the stock sales needed to finance the HSA contribution.

 

[bingybear]

Still awaiting word from an official source or pointer to actual IRS text that says the DW can't do the same transfer I just did on my account though perhaps to another HSA in her name some time in the future.

Doesn't the same info you used to do your transfer allow your wife to to a transfer to her hsa account in a different year?

I'm not going to search for something I think doesn't exist... that is that she can to a qualified distribution to your account.

 

[thefinancebuff]

Just to make it somewhat clearer-- the larger payment from consulting would kick long term capital gains into effect on the stock sales needed to finance the HSA contribution.

The deduction from the HSA contribution will more than offset the long term capital gains.

 

[ArkTinkerer]

The deduction from the HSA contribution will more than offset the long term capital gains.

Yes, I'll mourn those dollars if and when I have that payment in hand!

 

[bingybear]

Still awaiting word from an official source or pointer to actual IRS text that says the DW can't do the same transfer I just did on my account though perhaps to another HSA in her name some time in the future.

This is not directly from the IRS, but this shows that a spouse can not fund your HSA with a Qualified HSA Funding Distributon to your HSA.

Also see IRS Notice 2008-51

below quote from linkj

Types of IRAs Permitted for HSA Funding. A qualified HSA funding distribution may be made from a traditional IRA or a Roth IRA,
but not from an ongoing SIMPLE IRA or a SEP IRA. A SEP or a SIMPLE is considered ongoing if an employer contribution is made
for the plan year ending with or within the IRA owner's taxable year in which the qualified HSA funding distribution would be made.
You cannot move money directly from a 401(k) into an HSA; however, you may be able to move the money from a 401k to an IRA
and then to an HSA. You also cannot use your spouse’s or someone else’s IRA. But see “inherited IRAs.”

I think you have your complete answer

 

[ArkTinkerer]

Did get confirmation that DW can go from her IRA to a new HSA in her name. Both HSAs would be available for use after that. I did find this link which seems to layout the rules for when both have HSA accounts:

https://support.tangohealth.com/hc/...-Practices-when-Spouses-are-Both-HSA-Eligible