An Individual Retirement Account (IRA) is a retirement vehicle that allows after-tax money to grow tax-deferred. A Health Savings Account (HSA) allows employees with high-deductible health insurance plans (HDHPs) to save pretax money---money that is deducted from your paycheck before takes are taken out---for qualified medical expenses. HSA deposits and earnings accumulate tax-free from year to year; withdrawals are also tax-free. Until you reach age 65, you can take out money only for medical expenses, but after that, you can spend the money any way you want (although withdrawals for non-medical expenses after age 65 will be taxed as income). Consequently, some consider and use the HSA as retirement savings. Putting IRA money into an HSA may help you avoid some taxes. You can only transfer funds from an IRA to an HSA once in your lifetime, with one exception.
Check current tax law to find out how much you can transfer from an IRA to an HSA. The key piece of information is your yearly contribution limit. The amount depends, among other factors, on your age and whether your high-deductible health plan covers only you as an individual, or your entire family. For tax year 2009, the limit for individuals is $3,000; if your HDHP covers your family, the limit is $5,950. For tax year 2010, the limits will be $3,050 for individual coverage and $6,150 for family. If you are 55 or older, you can contribute an extra $1,000 to your HSA. If you transfer an amount equal to the contribution limit to your HSA, you will not be able to make any further HSA contributions that tax year. Health savings account contribution limits are revised by the IRS regularly to keep up with inflation.
Ask your IRA plan administrator to make out a check for no more than your annual contribution limit to your HSA trustee. This is known as a trustee-to-trustee, or direct, transfer. It is the only way the IRS will allow you to make the transfer tax-free. If your IRA administrator writes a check to you, and you deliver it to your HSA trustee, you will be taxed on the distribution and slapped with an extra 10% penalty on the transferred funds.
Hold on to your HSA eligibility for 12 months after the transfer. If you complete your IRA-to-HSA transfer June 10, 2010, you will have to remain eligible for an HSA, which means keeping your high-deductible health plan, until at least June 30, 2011 to avoid being taxed on the transferred money. If you drop your HDHP before a year has passed, expect to pay not only regular income tax on the transferred funds but also a 10 percent penalty on those funds.
The sole exception to the once-in-a-lifetime rule? If, during the same tax year in which you make your IRA-to-HSA transfer, you change your HDHP coverage from individual to family coverage, you will be allowed to transfer up to $6,150 (for tax year 2010) from your IRA that year. Say you transfer $3,050 in March 2010 when you had individual HDHP coverage, and you switch to family coverage in August 2010. You will be able to transfer an additional $3,100 to your HSA. However, you will need to keep your family HDHP coverage until at least August 31, 2011.
Always consult a tax and/or financial professional about possible tax implications before making any changes to your retirement plan.
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