Help with IRS/HSA Legalese

[Yoheadden]

If I am reading this accurately, then the IRS allows someone to transfer $ from a SEP or Simple IRA to fund an HSA, as long as the SEP or Simple is not funded for that year.
What does it mean when it says you can make only one contribution in your lifetime?
The DW and I both have HSAs at our local bank and unfortunately, they don’t offer investment options. I plan to transfer them to soon-to-be-opened, HSAs at Vanguard where most of our accounts are. I was planing on funding them with an after tax account there, but if I can make transfers from a SEP, then that would be great. It would act very similar to a Roth Conversion, except to the HSA.
This sounds too good to be true, so I’m sure I’m missing something.
Does anyone have any experience with this ?

Qualified HSA funding distribution. A qualified HSA funding distribution may be made from your traditional IRA or Roth IRA to your HSA. This distribution can’t be made from an ongoing SEP IRA or SIMPLE IRA. For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within the tax year in which the distribution would be made.
The maximum qualified HSA funding distribution depends on the HDHP coverage (self-only or family) you have on the first day of the month in which the contribution is made and your age as of the end of the tax year. The distribution must be made directly by the trustee of the IRA to the trustee of the HSA. The distribution isn’t included in your income, isn’t deductible, and reduces the amount that can be contributed to your HSA. The qualified HSA funding distribution is shown on Form 8889 for the year in which the distribution is made.

You can make only one qualified HSA funding distribution during your lifetime. However, if you make a distribution during a month when you have self-only HDHP coverage, you can make another qualified HSA funding distribution in a later month in that tax year if you change to family HDHP coverage. The total qualified HSA funding distribution can’t be more than the contribution limit for family HDHP coverage plus any additional contribution to which you are entitled.

Example. In 2020, you are an eligible individual, age 57, with self-only HDHP coverage. You can make a qualified HSA funding distribution of $4,550 ($3,550 plus $1,000 additional contribution).
Funding distribution—testing period. You must remain an eligible individual during the testing period. For a qualified HSA funding distribution, the testing period begins with the month in which the qualified HSA funding distribution is contributed and ends on the last day of the 12th month following that month. For example, if a qualified HSA funding distribution is contributed to your HSA on August 10, 2020, your testing period begins in August 2020, and ends on August 31, 2021.
If you fail to remain an eligible individual during the testing period, for reasons other than death or becoming disabled, you will have to include in income the qualified HSA funding distribution. You include this amount in income in the year in which you fail to be an eligible individual. This amount is also subject to a 10% additional tax. The income and the additional tax are calculated on Form 8889, Part III.

Each qualified HSA funding distribution allowed has its own testing period. For example, you are an eligible individual, age 45, with self-only HDHP coverage. On June 18, 2020, you make a qualified HSA funding distribution. On July 27, 2020, you enroll in family HDHP coverage and on August 17, 2020, you make a qualified HSA funding distribution. Your testing period for the first distribution begins in June 2020 and ends on June 30, 2021. Your testing period for the second distribution begins in August 2020 and ends on August 31, 2021.

The testing period rule that applies under the last-month rule (discussed earlier) doesn’t apply to amounts contributed to an HSA through a qualified HSA funding distribution. If you remain an eligible individual during the entire funding distribution testing period, then no amount of that distribution is included in income and won’t be subject to the additional tax for failing to meet the last-month rule testing period.

 

[cathy63]

Yes, you can fund your HSA for one year only from a SEP IRA as long as your employer is no longer contributing to that SEP IRA. "Once in a lifetime" means that if you do it in 2021, you can't do it again in 2022 or any future year.

This is better than a Roth Conversion because you don't have to pay income tax on the funds that you move. However, if you have cap gains or other income it may be better to make a regular HSA contribution than to do a qualified distribution from funds that are already tax deferred. You have to do the math and figure out what works best for your situation.

 

[zinger1457]

I was planing on funding them with an after tax account there, but if I can make transfers from a SEP, then that would be great. It would act very similar to a Roth Conversion, except to the HSA.
This sounds too good to be true, so I’m sure I’m missing something.

If you have the funds available it would make more sense to me to fund your HSA with after tax dollars, then you get to deduct that amount from your income on your taxes. I would only consider the IRA to HSA transfer option if I didn't have the after tax funds available to fund my HSA. Maybe there are other cases I'm not aware of where it would make sense, I'm sure others will chime in.

 

[RunningBum]

If you have the funds available it would make more sense to me to fund your HSA with after tax dollars, then you get to deduct that amount from your income on your taxes. I would only consider the IRA to HSA transfer option if I didn't have the after tax funds available to fund my HSA. Maybe there are other cases I'm not aware of where it would make sense, I'm sure others will chime in.

I would think so too.

Suppose you plan to make a $5000 HSA contribution. (I know the limit is different, just using round numbers).

You could contribute $5000 to your HSA from after tax funds, and convert $5000 from your IRA to your Roth, for a net $0 income, except for any possible cap gains in your after tax account to raise the $5000. That's $10,000 you now have in accounts that grows tax free.

Or you could move $5000 from your IRA to your HSA. Also a net $0 income. But you've only been able to move $5000 to a tax free account. If you also want to get $5000 converted over to your Roth, you are fully taxed on the conversion.

Maybe the advantage is if your after tax account is low and you need it for living expenses, perhaps because you are under 59.5. You don't get the conversion, but you are able to fund your HSA without impacting the after tax account.

 

[qwerty3656]

I rolled over $8100 (family limit of 7100 plus $1000 for 0ver 55 catch up) from my taxable IRA to my HSA. As someone said it like doing a Roth conversion, but there is no taxable income.

 

[audreyh1]

I prefer to fund my HSA with after tax dollars and get the tax deduction.

I could see being able to initially fund from an IRA if someone didn’t have money to fund the HSA and had some expected medical expenses to cover.

 

[pb4uski]

Yes, you can fund your HSA for one year only from a SEP IRA as long as your employer is no longer contributing to that SEP IRA. "Once in a lifetime" means that if you do it in 2021, you can't do it again in 2022 or any future year.

This is better than a Roth Conversion because you don't have to pay income tax on the funds that you move. However, if you have cap gains or other income it may be better to make a regular HSA contribution than to do a qualified distribution from funds that are already tax deferred. You have to do the math and figure out what works best for your situation.

So... we have HSAs and have never done this. I still have a tIRA but DW only has Roth.

Let's say that in 20 years that I need to go into a nursing home and let's say it costs $200k/year (in 20 years remember).... could I transfer say, $600k and then use the $600k to pay nursing home costs and never have to pay tax on the $600k? I think so.

I guess the risk is that if I die before the $600k is used up that any remaining money is immediately subject to tax rather than over 10 years if it is in a tIRA.

Additional question though.... if DW goes into a nursing home can I do a once in a lifetime transfer of money from my tIRA to her HSA? I suspect not but if I could that would be very cool.

 

[audreyh1]

So... we have HSAs and have never done this. I still have a tIRA but DW only has Roth.

Let's say that in 20 years that I need to go into a nursing home and let's say it costs $200k/year (in 20 years remember).... could I transfer say, $600k and then use the $600k to pay nursing home costs and never have to pay tax on the $600k? I think so.

I guess the risk is that if I die before the $600k is used up that any remaining money is immediately subject to tax rather than over 10 years if it is in a tIRA.

Additional question though.... if DW goes into a nursing home can I do a once in a lifetime transfer of money from my tIRA to her HSA? I suspect not but if I could that would be very cool.

No.

You can only do this when you are eligible to contribute to an HSA. Not later.

You are limited to a one time annual contribution, and you cannot make other contributions that same year if you fund the full annual amount.

 

[qwerty3656]

So... we have HSAs and have never done this. I still have a tIRA but DW only has Roth.



Let's say that in 20 years that I need to go into a nursing home and let's say it costs $200k/year (in 20 years remember).... could I transfer say, $600k and then use the $600k to pay nursing home costs and never have to pay tax on the $600k? I think so.



I guess the risk is that if I die before the $600k is used up that any remaining money is immediately subject to tax rather than over 10 years if it is in a tIRA.



Additional question though.... if DW goes into a nursing home can I do a once in a lifetime transfer of money from my tIRA to her HSA? I suspect not but if I could that would be very cool.

It's a 1 time thing for 1 annual contribution - you can't transfer hundreds of thousands. The most you can transfer from IRA is what I did - $8100. Any other contributions to HSA come from non IRA money.

 

[cathy63]

So... we have HSAs and have never done this. I still have a tIRA but DW only has Roth.

Let's say that in 20 years that I need to go into a nursing home and let's say it costs $200k/year (in 20 years remember).... could I transfer say, $600k and then use the $600k to pay nursing home costs and never have to pay tax on the $600k? I think so.

I guess the risk is that if I die before the $600k is used up that any remaining money is immediately subject to tax rather than over 10 years if it is in a tIRA.

Additional question though.... if DW goes into a nursing home can I do a once in a lifetime transfer of money from my tIRA to her HSA? I suspect not but if I could that would be very cool.

No, this law is just saying you can use a retirement account once to fund your normal annual HSA contribution. You still have to qualify to contiribute to an HSA and you can't fund the HSA at more than the annual contribution limit. So you have to have an eligible high deductible health plan, and the limit for full year coverage is currently $4600 for an individual or $8200 if you are on a family plan. I don't know if you can fund someone else's HSA. I would guess not, but even if you can, the max would still be $4600 or $8200.

When we first opened HSAs I tried to figure out if it would make sense to do this, and the only thing I could figure out was that if we ever didn't have enough income to take advantage of the deduction, it would be better to move money from our IRAs than to use after-tax money and waste the deduction. That is extremely unlikely to happen.

 

[pb4uski]

Thanks. We are now on Medicare so can't contribute any longer.... actually it has been many years since we had a HSA eligible policy.

 

[Yoheadden]

Thank you for the information. I can see doing this in the future, but for my situation, maybe not now. I read the IRS page as it only being a 1 time transfer, but it just didn’t sink in, as I couldn’t think why it would be just once, in a lifetime.

I’ve always been pretty passive about our HSAs, just being happy we had the tax advantage and accepting our plan didn’t have investment options. The more I read and educate myself, (especially with this forum), the more confidence I get in taking action in all aspects of our financials. I realize that by keeping our HSAs in our local bank, that they are not working in the best way for us and are suffering from risk of inflation and next to nothing earnings.

 

[Sunset]

Well I started to get excited reading this thread, and appreciate all the knowledgeable folks that pointed out the limit on the contribution.

I was hoping for a gift from the IRS, how silly of me

 

[Yoheadden]

Since the OP was about funding an HSA, my F/U question may seem a little counter productive.
Should we continue to fund our HSAs ?
Since every personal financial question is, well, personal to each person’s situation, here is ours.
DW and I are both 51. We plan on ER in 3 years at 54.
We are not high earners, but rather high savers and definitely LBOMs.
We currently save $54,200 a year.
$33,000 to Simple IRAs, $14,000 to Roth’s and $7,200 to HSAs
We make just over $70,000 a year, so when I say we use every refund, rebate and found penny in the street, I mean it. Somehow I manage to get all accounts funded by years end. Is it a challenge, sure, but we think being able to ER is worth it.
We have no kids, no debt and no mortgage. House is paid off free and clear.
My real problem is by ERing at 54, we have 5 years to go, before we can tap into tax deferred accounts without penalty and my cash/taxable accounts are on the lower end.
Savings include: $78,792 HSA accounts
$119,279 cash/taxable
$1,017,032 in SEP/Simple-SEP is no longer funded. Simples are.
$288,413 in Roth IRAs
So, this brings me back to my ?
Stop funding the HSAs to add to the taxable accounts ?
I should also start doing Roth conversions, but need to watch out for the ACA amounts.
Any other suggestions/recommendations?

 

[ocean view]

Circling back to your original post, you mentioned a “soon to be opened Vanguard HSA account”. I just looked at the VG site and it looks like VG still does not offer an HSA account held directly with them. They refer their clients to use a company called HSA Administrators. Be advised that HSA Administrators is really good at collecting fees and not much else on the administration side. You might be better off to open your account at Fidelity. They offer a zero fee HSA account and have plenty of investment options.

From prior threads here, I know that I am one of the many members who moved our HSA accounts to Fidelity from the HSA Administrators.

 

[Yoheadden]

Circling back to your original post, you mentioned a “soon to be opened Vanguard HSA account”. I just looked at the VG site and it looks like VG still does not offer an HSA account held directly with them. They refer their clients to use a company called HSA Administrators. Be advised that HSA Administrators is really good at collecting fees and not much else on the administration side. You might be better off to open your account at Fidelity. They offer a zero fee HSA account and have plenty of investment options.

From prior threads here, I know that I am one of the many members who moved our HSA accounts to Fidelity from the HSA Administrators.

Wow, that’s disappointing, as I am trying to keep things as simple and consolidated as possible. Thank you for the reply and head’s up.

 

[qwerty3656]

Since the OP was about funding an HSA, my F/U question may seem a little counter productive.
Should we continue to fund our HSAs ?
Since every personal financial question is, well, personal to each person’s situation, here is ours.
DW and I are both 51. We plan on ER in 3 years at 54.
We are not high earners, but rather high savers and definitely LBOMs.
We currently save $54,200 a year.
$33,000 to Simple IRAs, $14,000 to Roth’s and $7,200 to HSAs
We make just over $70,000 a year, so when I say we use every refund, rebate and found penny in the street, I mean it. Somehow I manage to get all accounts funded by years end. Is it a challenge, sure, but we think being able to ER is worth it.
We have no kids, no debt and no mortgage. House is paid off free and clear.
My real problem is by ERing at 54, we have 5 years to go, before we can tap into tax deferred accounts without penalty and my cash/taxable accounts are on the lower end.
Savings include: $78,792 HSA accounts
$119,279 cash/taxable
$1,017,032 in SEP/Simple-SEP is no longer funded. Simples are.
$288,413 in Roth IRAs
So, this brings me back to my ?
Stop funding the HSAs to add to the taxable accounts ?
I should also start doing Roth conversions, but need to watch out for the ACA amounts.
Any other suggestions/recommendations?

I would vote for HSA over Simple IRA (so if your reducing funding, maybe put less in regular IRA?)

 

[Yoheadden]

So you are saying, keep the HSAs and stop funding our Simple IRAs.
I admit, the low taxable has me concerned, but not funding the Simples will raise our income tax.
I guess it might come down to the lesser of the 2 evils. You can only split the pot so many ways :-(

 

[RunningBum]

So you are saying, keep the HSAs and stop funding our Simple IRAs.
I admit, the low taxable has me concerned, but not funding the Simples will raise our income tax.

An HSA contribution reduces your taxable income just like the IRA does, plus it's got the benefit of no tax when you withdraw for an eligible expense. At worst case after 65 you withdraw for non-eligible expenses and you get taxed like an IRA withdrawal. Well, an even worse case is that you die with an HSA balance, in which case your heirs have to withdraw it all immediately and get taxed on it. So use it up when you can. I would absolutely fully fund the HSA first, over an IRA if you can't do both. With the caveat that I don't know if there are special benefits for the Simple.

You know about saving your receipts since you started the HSA and being able to withdraw based on those receipts, right? So you can leave the HSA to grow and pay medical bills out of pocket, and withdraw the money later when you need it.

Then the question is whether to fund your IRA or Roth or taxable. You don't give enough info for that. Usually when you are still working you want to defer income, so it might be the IRA. Depends on what your tax rate will be when you have to start withdrawing.

Also realize that you can withdraw Roth contributions at any time. I've never done this so check for yourself if there are any limitations on that. Maybe a 5 year wait on each contribution?

It's the right question to ask, how to bridge that gap time between ER and when you have full access to retirement funds at 59.5. You don't say how much you will need.

 

[Bamaman]

HSA saved my tail when I retired and had 6 1/2 years to go until Medicare. My healthcare and my wife's Medicare supplement were covered by HSA until 1 month shy of Medicare.

Need to take advantage of such a plan whenever possible.

 

[SecondCor521]

Also realize that you can withdraw Roth contributions at any time. I've never done this so check for yourself if there are any limitations on that. Maybe a 5 year wait on each contribution?

Nope, there is no 5 year wait on Roth contributions. You can make a Roth contribution today (assuming you qualify to make a contribution) and remove it tomorrow. Probably not the wisest thing, because you lose tax-free growth on that amount forever, but perfectly legal.

Also, the IRS deems any withdrawals from Roths to be contributions first, conversions second, and earnings last.

As for the HSA question, my plan is to keep money in there for a long while but I don't want it to be in there when I die because of the adverse taxation. So I plan to empty it before it gets too full. Too full to me means an amount of money that I won't be able to drain it by age 70 or so. Whether you have too much or not depends on what you expect your HSA eligible expenses to be, which is a highly individual number.

 

[zinger1457]

As for the HSA question, my plan is to keep money in there for a long while but I don't want it to be in there when I die because of the adverse taxation. So I plan to empty it before it gets too full. Too full to me means an amount of money that I won't be able to drain it by age 70 or so. Whether you have too much or not depends on what you expect your HSA eligible expenses to be, which is a highly individual number.

Besides medical expenses after you turn 65 you can also use the funds in your HSA to pay Medicare premiums without having to pay taxes on the amount withdrawn.

 

[SecondCor521]

Besides medical expenses after you turn 65 you can also use the funds in your HSA to pay Medicare premiums without having to pay taxes on the amount withdrawn.

Yup. I factor that in on my spreadsheet.

 

[Yoheadden]

That was my plan as well. Use the HSA withdrawals to cover Medicare premiums.

 

[audreyh1]

That’s exactly what DH is doing, and what I plan to do. Pay directly from the HSA. Super simple documentation.