HSA reimbursements to Roth?

[turbo89]

Hello all,

Are there down-sides to reimbursing myself from an HSA and then using a back door Conversion to get the funds into a ROTH IRA?

My wife and I were recently going through our HSAs and medical expense tracker. When doing this we “re-remembered” that our employer sponsored HSAs have limited investment, with relatively high fees (but our employers contribute, offsetting maintenance fees).

We’re now contemplating the idea of reimbursing ourselves and rolling the funds into a Roth.

I can’t think of any down sides to this… but I’m sure others on here may be able to identify some things to look out for?

 

[SevenUp]

You can't do a formal "rollover" or "conversion" of HSA funds to a Roth IRA.

You can take a legitimate HSA withdrawal and then contribute that amount to a Roth IRA, if you separately have earned income to justify the Roth contribution. But the money you withdrew from the HSA and then contributed to the Roth IRA eats into the amount you are allowed to contribute to the Roth IRA without touching the HSA.

E.g., if you have enough (and not too much) earned income to justify a $6000 Roth IRA contribution, and also have $6000 in your HSA and $6000 of qualifying medical expenses, you could "move" the $6000 from the HSA to the Roth IRA and end up with $0 in the HSA and $6000 in the Roth IRA.

Or you could contribute $6000 to the Roth IRA, not touch the HSA, and end up with $6000 in the HSA and $6000 in the Roth IRA.

 

[SevenUp]

...our employer sponsored HSAs have limited investment, with relatively high fees (but our employers contribute, offsetting maintenance fees).

An alternative is to transfer your HSA funds to a Fidelity HSA, where there are no separate HSA fees, and use Fidelity's good low-cost funds. Call Fidelity who would be happy to help with the transfer.

 

[turbo89]

You can't do a formal "rollover" or "conversion" of HSA funds to a Roth IRA.

You can take a legitimate HSA withdrawal and then contribute that amount to a Roth IRA, if you separately have earned income to justify the Roth contribution. But the money you withdrew from the HSA and then contributed to the Roth IRA eats into the amount you are allowed to contribute to the Roth IRA without touching the HSA.

E.g., if you have enough (and not too much) earned income to justify a $6000 Roth IRA contribution, and also have $6000 in your HSA and $6000 of qualifying medical expenses, you could "move" the $6000 from the HSA to the Roth IRA and end up with $0 in the HSA and $6000 in the Roth IRA.

Or you could contribute $6000 to the Roth IRA, not touch the HSA, and end up with $6000 in the HSA and $6000 in the Roth IRA.

Thanks, but we don’t qualify for a Roth, so we can only contribute through a back door conversion. We were planning to roll the legitimate HSA withdrawals into a new IRA (post-tax contribution), then use a back door conversion to put it into our existing Roth accounts.

An alternative is to transfer your HSA funds to a Fidelity HSA, where there are no separate HSA fees, and use Fidelity's good low-cost funds. Call Fidelity who would be happy to help with the transfer.

This is another good idea! Not sure if I need a third HSA though, lol. I’d rather “get it into” my Roth, allowing me to withdraw the contribution later penalty free if needed.

 

[cathy63]

Thanks, but we don’t qualify for a Roth, so we can only contribute through a back door conversion. We were planning to roll the legitimate HSA withdrawals into a new IRA (post-tax contribution), then use a back door conversion to put it into our existing Roth accounts.

The only permitted rollover from an HSA is to another HSA. There is no way to get the money out of the HSA and still keep it growing tax deferred in an IRA or a Roth IRA.

 

[SevenUp]

We were planning to roll the legitimate HSA withdrawals into a new IRA (post-tax contribution), then use a back door conversion to put it into our existing Roth accounts.

Is it clear that this will reduce your total tax-free balance (in HSA plus Roth IRA), compared with leaving the money in the HSA and making new backdoor contributions to the Roth IRA?

 

[HenryD]

Not sure if I need a third HSA though, lol. I’d rather “get it into” my Roth, allowing me to withdraw the contribution later penalty free if needed.

If you have already incurred the eligible expenses you can withdraw any time later, penalty-free, from your HSA. It will continue to grow tax-free in the meantime; the Roth gets you nothing. Fidelity HSA is the way to go.

 

[ocean view]

If you have already incurred the eligible expenses you can withdraw any time later, penalty-free, from your HSA. It will continue to grow tax-free in the meantime; the Roth gets you nothing. Fidelity HSA is the way to go.

+1

No age restrictions or 5 year rules to deal with either.

 

[turbo89]

Is it clear that this will reduce your total tax-free balance (in HSA plus Roth IRA), compared with leaving the money in the HSA and making new backdoor contributions to the Roth IRA?

In theory this will leave our post-tax balance the same.

Here’s a hypothetical case:
1. We reimburse ourself for $1000 of legitimate medical expenses. This money is deposited into our bank account.
2. We open a new IRA (non-Roth) with the $1000. This is “post tax money”, because it was a qualifying reimbursement.
3. We use a back door Roth IRA rollover to deposit the $1000 into our existing Roth.

In this hypothetical case we would have $1000 in post tax money now in our Roth. This would be a “contribution”, so it would be eligible for withdrawal without penalty (following Roth rules), and it would grow tax free.

Are we missing something here?

It Seems like rolling into a fidelity HSA is another option, but this won’t alleviate us from having to maintain old medical bill records… not a big deal now, but 30+ years of records may turn into a nightmare later in life (until we meet age eligibility requirements).

+1

No age restrictions or 5 year rules to deal with either.

This is something else to consider, right now paying “out of pocket” isn’t that big of a deal. We have sort of just been doing this for years and just using the HSA as a tax efficient vehicle (While tracking medical expenses as they come up).

 

[SevenUp]

Here’s a hypothetical case:
1. We reimburse ourself for $1000 of legitimate medical expenses. This money is deposited into our bank account.
2. We open a new IRA (non-Roth) with the $1000. This is “post tax money”, because it was a qualifying reimbursement.
3. We use a back door Roth IRA rollover to deposit the $1000 into our existing Roth.

In this hypothetical case we would have $1000 in post tax money now in our Roth. This would be a “contribution”, so it would be eligible for withdrawal without penalty (following Roth rules), and it would grow tax free.

Are we missing something here?

Yes, assuming you could have made the Roth contribution without taking the HSA distribution. If your income is high enough to prevent a direct Roth contribution, that seems a reasonable assumption, but...?

There is nothing special about the $1000 you take from the HSA, compared with (for example) taking $1000 from your bank saving account and moving it to your bank checking account.

In your step 2, simply transferring $1000 from your checking account (regardless of where that came from) to a traditional IRA is a post-tax contribution provided you don't deduct that IRA contribution when you file form 1040.

 

[mrfeh]

An alternative is to transfer your HSA funds to a Fidelity HSA, where there are no separate HSA fees, and use Fidelity's good low-cost funds. Call Fidelity who would be happy to help with the transfer.

+1

Open a different HSA with good investment options.

 

[turbo89]

Thanks for all the feedback, you’re all doing a good job convincing me to open a new HSA.

 

[oldtimer]

Realize that the HSA money you are trying to get into the Roth account just becomes part of your annual non-deductible contribution limit for the year. If you take out $6000 ($7000 for those 50+) from the HSA and backdoor it to the Roth, you cannot contribute anymore other money to the IRA for the year. You are moving money from the HSA to Roth account, but not adding anything to the total that is in the HSA+Roth.