ACA, HSA, and IRA

[bushpilot]

Hypothetical story - supposing DW and I are living off a traditional IRA, drawing $xxxx per month. We have an HSA qualified ACA plan, with tax credits to bring the cost down to about $xxx /month. Can we also fund an HSA from the IRA, or does an HSA need to be funded from earned income? And avoid paying taxes on the IRA -> HSA transfers, within the limits?

If so, what is the downside of doing this? It seems like a way to improve the potential tax savings over time.

 

[audreyh1]

HSA contributions do not have to be earned income. Retirees can fund HSAs no problem as long as they have an HSA compatible health plan.

 

[RunningBum]

And there is no downside, only upside. Funding the HSA reduces your income, which increases your subsidy. If it reduces your income to where you'd get medicaid and don't want that, convert some of that IRA to a Roth to boost your income enough. I suppose if you have nothing left in the IRA to convert you might not want to make an HSA contribution, but that's the only reason I can think of.

 

[bushpilot]

This sounding good!

If it reduces your income to where you'd get medicaid and don't want that, convert some of that IRA to a Roth to boost your income enough.

I need to investigate this further, as I am not sure why getting Medicaid is to be avoided.

 

[MRG]

This sounding good!



I need to investigate this further, as I am not sure why getting Medicaid is to be avoided.

Limited providers.

 

[bushpilot]

... convert some of that IRA to a Roth to boost your income enough.

What happens after 59.5 if one converts and then withdraws from it within 5 years? I am still trying to figure that one out, if such a topic shift is appropriate.

 

[bingybear]

IIRC the 5 year rules (penalties) vanish at 59.5 yo.

There is some validation that medicaid can have more limited providers. Depending upon your state, you could have estate recovery if you go on medicaid for healthcare.

I've never really understood funding a HSA with an IRA. IIRC you can do this once in your life. The advantage is that you can do this before 59.5 without penalty (ok, that is one advantage), you don't get to move the IRA $ over free and take the income off your income.

I would be cautious if you are living of TIRA and funding HSA with $ taken from the TIRA. You can't write off the HSA contribution when you fund from a TIRA (or it is a wash due to paying for taking $ out of the TIRA).

 

[RunningBum]

I'm pretty sure there is a 5 year rule no matter the age. The Roth just needs to have been opened 5 or more years ago. If you have a Roth that's been open that long, there are no time limits, no penalties, and no taxes on the distribution for someone over 59.5 (which I assume the OP is, since they are withdrawing from the IRA). If there's no existing Roth, or opened less than 5 years, there's still a 5 year clock. Someone correct me if I'm wrong but this is what I read at Fairmark and other places.

Since it looks like the OP is over 59.5, they don't have to do it as a one time direct IRA->HSA funding, they can simply withdraw from the IRA, and contribute to the HSA in two separate steps, as often as they want up to limits.

 

[Lcountz]

please go to IRS website irs.gov and look up Publication 969....


Will explain it all, including the once in a lifetime allowable trustee to trustee transfer FROM an IRA to a HSA, the age you must stop contributing because you start Medicare, etc.


If you choose the one-time transfer of money from your Traditional IRA to your HSA (which is done by the institutions involved, you never get the money in your hand to do the transfer), you can NOT deduct that HSA that tax year, from your income. But, you will also not pay INCOME TAX on the money transferred from the IRA to fund the HSA!)



As far as the 5 year rule....do you have "a" ROTH IRA of ANY kind now that is more than 5 years old? And are you older than 59+1/2? If so, your conversion dollars and any earnings From a Trad to Roth IRA can be taken any time without the 10% PENALTY.



( Of course you'd still pay INCOME TAX on the amount you convert from Traditional IRA to Roth IRA!)....Don't confuse the PENALTY with INCOME TAX due on the conversion amount!!!!



Pub 590 (A) and 590 (B) on IRS website explains more!


Hope this helps!

 

[Carpediem]

This website seems to indicate you can make contributions to a HSA from an tIRA withdrawal on an ongoing basis and realize the tax benefits.

Transfer IRA Money to an HSA

Other Options
If you can make contributions to both your HSA and a Traditional IRA, you will lower your adjusted gross income (AGI) and reduce your taxes, and your IRA will continue to grow for retirement. If money is tight and you are 59½ or older, you could take a regular withdrawal from your IRA and use it to contribute to your HSA. The tax bite from the Traditional IRA withdrawal and the tax deduction from the HSA contribution should nearly cancel each other out. Most important, you can do this more than once—in fact, every year if you want.

 

[audreyh1]

You are just making a regular IRA withdrawal and paying tax on it. It doesn’t matter where the funds put in the HSA come from. So they approx. cancel each other out - neutral tax benefit for the years of contribution. But at least you have tax-free funds you can tap into long term to pay medical expenses, something you can’t do with an IRA. You can do this to contribute from 59.5 up to Medicare age, so for 5.5 years.

Can make sense if you don’t have ready cash every year to invest in the HSA.

Otherwise if you aren’t drawing on an IRA for income, more tax benefit if you use taxable accounts to fund it.

 

[bushpilot]

Thanks for the input everyone.

Back to original topic ...

I've never really understood funding a HSA with an IRA. IIRC you can do this once in your life. The advantage is that you can do this before 59.5 without penalty (ok, that is one advantage), you don't get to move the IRA $ over free and take the income off your income.

I would be cautious if you are living of TIRA and funding HSA with $ taken from the TIRA. You can't write off the HSA contribution when you fund from a TIRA (or it is a wash due to paying for taking $ out of the TIRA).

In retirement, pre Medicare, it is reasonable to shift funds to an HSA to improve it's tax status. If used eventually for medical expenses, the tax deferred (IRA) has become tax free (HSA) through this move. After a certain age (66?) it can also be used for any reason, penalty free, but still need to pay taxes if not used for medical.

 

[Smitty700]

A couple of thoughts on HSAs:

1. HSAs are one of the best tax-advantaged accounts that exist. By funding an HSA with tIRA money, you can now withdraw the money tax free from your tIRA to pay for medical expenses. Done this way, It can be viewed as a non-taxable Roth conversion.
   
   For example, I withdraw $2000 from my tIRA and fund my HSA with it. I have $2000 income from the withdraw but have a $2000 HSA deduction, so effectively I pay no taxes on the withdraw. But the money can now be withdrawn tax free from the HSA to pay for eligible medical expenses.
   
   
2. You can withdraw from your HSA to pay previous year expenses with no time limit (just as long as it was after you funded the HSA). I don't need my HSA money now, so I track my medical expenses and keep my receipts. When I do decide to withdraw the money, say five or ten years from now, I can designate that withdraw for my 2019 expenses. I can let the money grow and take it out sometime in the future with no taxes or penalties.

HSAs are a sweet deal.

 

[bushpilot]

HSAs are a sweet deal.

Yep!

 

[PointBreeze]

Yes, I really wanted to do this, but my health insurance provider of choice does not offer an HSA plan