Q: I’m now on Medicare, but I had opened a health savings account when I was working and was covered by a high-deductible health insurance policy. Can I transfer funds from a traditional IRA to a health savings account? How much can be transferred?
A: You can only transfer money from an IRA to an HSA if you’re still eligible to make new HSA contributions.
Because you’ve enrolled in Medicare, you no longer can contribute to your HSA, although you can use the money in the account tax free for eligible medical expenses. And now that you’re over 65, these expenses include Medicare parts B and D as well as Medicare Advantage premiums.
People who qualify to make HSA contributions may do a rollover from an IRA to an HSA, which can be a good way to build up the account if you don’t have other cash to contribute. You currently must have an HSA-eligible health insurance policy with a deductible of at least $1,300 for single coverage or $2,600 for family coverage.
The amount you can roll over is the same as your annual HSA contribution limit — up to $3,400 in 2017 if you have single coverage or $6,750 if you have family coverage, plus an extra $1,000 if you’re 55 or older. The annual contribution limit is the same, whether the money is coming from cash or an IRA rollover or a combination of the two.
You must transfer the money directly from the IRA to the HSA for the rollover to be tax-free, says Eric Dowley, senior vice president of HSAs for Fidelity. Contact your HSA administrator to find out how to do this. You can only roll over money from an IRA to an HSA once in your lifetime.
By doing a rollover, you’re converting tax-deferred dollars into tax-free money if you use the withdrawals from the HSA for medical expenses.
But you’ll get an even better tax benefit if you can contribute new money to the HSA instead. That way, you can keep more money growing tax-deferred in the IRA and get a tax deduction for the new HSA contribution.
For more about the rules for rolling over money from an IRA to an HSA, see the IRS bulletin at www.irs.gov/irb/2008-25_IRB/ar09.html.
Kimberly Lankford is a contributing editor to Kiplinger’s Personal Finance magazine. Send your questions and comments to firstname.lastname@example.org.