Health savings accounts, or HSAs, allow individuals a tax-advantaged way to save for medical expenses. You can only contribute to an HSA if you also have a qualified high-deductible health plan. An annuity is a type of retirement investment that provides a guaranteed income stream. Despite the fact that they are both tax-advantaged accounts, you cannot transfer money from an annuity directly to an HSA.
HSA Rollover Rules
You can do tax-free rollovers into a health savings account, but only from other health savings accounts and Archer MSAs, which are an older type of medical savings account plan. You cannot do tax-free rollovers into HSAs from retirement plans, nor from annuities.
Annuity Withdrawal Rules
Annuities are designed to provide future income streams, not to be a reserve against healthcare expenditures. If you do need to surrender an annuity to pay for medical expenses or simply transfer the cash into an HSA, you will pay income tax on the withdrawal. If you are under age 59 1/2, you will also pay a 10 percent penalty to the IRS for early withdrawals.
As of 2011, you can contribute up to $3,050 per year into an individual HSA, and up to $6,150 if you have family coverage. You can only make contributions in cash; you cannot hold property or stock in a health savings account.
If you have medical expenses in excess of 7.5 percent of your income, you may be able to make a hardship withdrawal from an individual retirement arrangement, or IRA, and avoid the 10 percent penalty. You will still owe income taxes on withdrawals from traditional IRAs. You may also tap a Roth IRA, as well, and your withdrawals will not be taxable, to the extent your medical bills exceeded 7.5 percent of your income, provided your contributions have been in the account for at least five years. Your 401k plan may have rules that allow you to take a taxable in-service withdrawal. Some 401ks will also allow you to borrow part of your balance, provided you pay it back within five years. If you own a permanent life insurance policy, such as a whole life or universal life policy, you may have cash value that you can withdraw or borrow against tax-free to pay medical bills.
- Internal Revenue Service: Health Savings Accounts
- Employee Benefit Research Institute. "Health Savings Account Balances, Contributions, Distributions, and Other Vital Statistics, 2017: Statistics From the EBRI HSA Database." Accessed Jan. 27, 2020.
- America's Health Insurance Plans. "Health Savings Accounts and High Deductible Health Plans Grow as Valuable Financial Planning Tools," Page 2. Accessed Nov. 7, 2019.
- The Wall Street Journal. "HSAs Offer Tax Benefits Beyond 401(k)s." Accessed Jan. 27, 2020.
- Internal Revenue Service. "2018 Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," Page 3. Accessed Nov. 7, 2019.
- Internal Revenue Service. "2018 Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," Page 8. Accessed Nov. 7, 2019.
- IRS. "Publication 969 (2019), Health Savings Accounts and Other Tax-Favored Health Plans." Accessed Sept. 9, 2020.
- Social Security Administration. "Medicare." Accessed Sept. 9, 2020.
- Internal Revenue Service. "Internal Revenue Bulletin: 2019-22." Accessed Jan. 27, 2020.
- Internal Revenue Service. "2018 Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans," Page 6. Accessed Nov. 7, 2019.
- Fidelity Investments. "A Couple Retiring in 2018 Would Need an Estimated $280,000 to Cover Health Care Costs in Retirement, Fidelity® Analysis Shows." Accessed Nov. 7, 2019.
Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.