Confirming understanding of IRA to HSA Contributions

[Romer]

I understand you can make a one time IRA to HSA direct contribution

What I was planning to do is withdraw $8750 (only one HSA account) from my IRA to my checking account

I was then planning on contributing $8750 from my checking account to my HSA

I wanted to confirm that the HSA contribution then offsets the IRA taxes from the same amount IRA withdrawal on my 1040.

It is similar to the one time contribution, but going through the checking account makes it two transactions and I can do it every year until I start Medicare

Do I have that correct? Thanks in advance

 

[teej1985]

Why do you want to use your one time conversion on that amount?

 

[SecondCor521]

Provided you are over 59.5 (and therefore not subject to the 10% early withdrawal penalty), and that you have only HSA qualified health insurance family coverage and you are 55 or more (and are therefore eligible to make an $8,750 HSA contribution), then it's almost correct.

I say almost because it does look like the IRA distribution is included when calculating taxability of Social Security, but the HSA adjustment is not. So if you are on SS, you might have slightly higher taxes due to this.

 

[Romer]

Why do you want to use your one time conversion on that amount?

I don't want to make a one time conversion. I want to make a normal distribution into my checking account and then make a separate deposit from my checking account into my HSA and do that every year until Medicare

I thought the one time conversion was limited to the same amount as the allowed contribution " Once in a lifetime, an eligible individual can transfer funds tax-free from their Individual Retirement Account (IRA) to his or her Health Savings Accounts (HSA)—up to the contribution amount allowed for the year of the transfer."

Provided you are over 59.5 (and therefore not subject to the 10% early withdrawal penalty), and that you have only HSA qualified health insurance family coverage and you are 55 or more (and are therefore eligible to make an $8,750 HSA contribution), then it's almost correct.

I say almost because it does look like the IRA distribution is included when calculating taxability of Social Security, but the HSA adjustment is not. So if you are on SS, you might have slightly higher taxes due to this.

I am 62
I have a High Deductible HSA qualified Medical plan
My wife and I are eligible to make a $8750 contribution into the one HSA account we have
I am not collecting social security, so taxability of SS is not applicable

 

[pb4uski]

Then it sounds like what you plan to do makes sense. I recall a number of years where we had HSA eligible policies and did what you describe except the IRA withdrawal side was a Roth conversion and the HSA contribution side was from taxable accounts, but on our tax return the HSA contribution deduction offset the IRA withdrawal income.

 

[audreyh1]

I don't want to make a one time conversion. I want to make a normal distribution into my checking account and then make a separate deposit from my checking account into my HSA and do that every year until Medicare

I thought the one time conversion was limited to the same amount as the allowed contribution " Once in a lifetime, an eligible individual can transfer funds tax-free from their Individual Retirement Account (IRA) to his or her Health Savings Accounts (HSA)—up to the contribution amount allowed for the year of the transfer."



I am 62
I have a High Deductible HSA qualified Medical plan
My wife and I are eligible to make a $8750 contribution into the one HSA account we have
I am not collecting social security, so taxability of SS is not applicable

Yes, the one-time IRA conversion is limited to the allowed contribution. I don’t know the mechanisms through which this is accomplished - if there is some direct way to do it.

Practically speaking it doesn’t seem any different than doing an IRA withdrawal and contributing the same amount to an HSA each year. Seems like they would cancel each other tax wise. The first year however there might be some direct rollover option that means no taxable income, but no tax deduction for the HSA contribution either.

 

[Romer]

Thanks. It seemed obvious to me looking at it. Thought it was worth validating

 

[USGrant1962]

I had to look this up because as described above it is not making any sense. If you are 59.5+ you can take an IRA distribution and make an offsetting HSA contribution every year, and the taxes will offset. No special one-time rule is required.

The rule in question is called QHSAFD - Qualified HSA Funding Distribution - and is a trustee-to-trustee direct rollover. It is only really useful for folks under 59.5 where it 1) allows the rollover and 2) avoids not only the tax but the 10% penalty.

Here is a good summary. https://www.lordabbett.com/en-us/fi...an-ira--a-once-in-a-lifetime-opportunity.html

So Romer, you can do what you are describing but it is not invoking the once-in-a-lifetime rule. You are just offsetting an IRA withdrawal with an HSA contribution - and you can do it next year too. HSA contributions don't have to be from earned income.

EDIT - I wish I knew this rule before I turned 59.5, it would have been nice to do that conversion one year.

 

[qwerty3656]

I say almost because it does look like the IRA distribution is included when calculating taxability of Social Security, but the HSA adjustment is not. So if you are on SS, you might have slightly higher taxes due to this.

The HSA contribution reduces income for ACA purposes though, right?

 

[audreyh1]

The HSA contribution reduces income for ACA purposes though, right?

Yes, it is an above the line deduction. Reduces AGI for IRMAA too.

 

[SecondCor521]

My wife and I are eligible to make a $8750 contribution into the one HSA account we have

It sounds like you want to max out your HSA. If that's accurate, as a side note, if your wife turns 55 at some point during this process, you'd be able to do an additional $1K catchup contribution for her each year into her HSA.

 

[Romer]

It sounds like you want to max out your HSA. If that's accurate, as a side note, if your wife turns 55 at some point during this process, you'd be able to do an additional $1K catchup contribution for her each year into her HSA.

Thanks. She is 62 as well

As I stated earlier we only have one HSA so no can do on the extra $1000. I guess we could open another one, but she doesn't like complicated (which card to use and when)

 

[SecondCor521]

Thanks. She is 62 as well

As I stated earlier we only have one HSA so no can do on the extra $1000. I guess we could open another one, but she doesn't like complicated (which card to use and when)

Understood. Yes, you could open another one for the additional $1000 per year, but I understand if the tradeoff and hassle isn't worth it.

 

[pb4uski]

... " Once in a lifetime, an eligible individual can transfer funds tax-free from their Individual Retirement Account (IRA) to his or her Health Savings Accounts (HSA)—up to the contribution amount allowed for the year of the transfer."...

That might come in handy once we have exhausted our HSAs... move whatever the contribution is in 10-15 years to our HSA and get a little bit more of tax-free withdrawals if used for qualified medical expenses.

Unfortunately, DW no longer has a tIRA... only a Roth.

Or, perhaps I should do it this year when I remember it.

 

[SecondCor521]

That might come in handy once we have exhausted our HSAs... move whatever the contribution is in 10-15 years to our HSA and get a little bit more of tax-free withdrawals if used for qualified medical expenses.

Unfortunately, DW no longer has a tIRA... only a Roth.

Or, perhaps I should do it this year when I remember it.

Probably this year is better.

In 10 or 15 years, you two will probably be on Medicare, and thus wouldn't be eligible to make an HSA contribution. I don't recall for certain offhand, but I think the one time QFHD thing still requires you being eligible to make the contribution, which would require an HDHP, which Medicare isn't.

Or just skip it if it's too much hassle. IIRC you were trying to draw your HSA down to get rid of it.

 

[pb4uski]

Probably this year is better.

In 10 or 15 years, you two will probably be on Medicare, and thus wouldn't be eligible to make an HSA contribution. I don't recall for certain offhand, but I think the one time QFHD thing still requires you being eligible to make the contribution, which would require an HDHP, which Medicare isn't.

Or just skip it if it's too much hassle. IIRC you were trying to draw your HSA down to get rid of it.

Ah... if you have to be eligible to make a HSA contribution then it is too late for us, we are now both on Medicare and have not had a HSA eligible policy for a long time. And yes, I am trying to drain/get rid of our HSAs to simplify our finances... would be two less accounts to deal with... but it will take 10-15 years at this rate IIRC.