A Health Savings The account is one of the most powerful tax-saving savings tools, but many people ignore its benefits. Your contributions are tax-deductible (or show off through your employer), the money is tax-deferred and can be tax-free for eligible medical expenses at any time. You can use HSA money to pay your health insurance deductible, payments and more. Out-of-pocket medical bill. Or you can use the money growing in the account for years and even to cover health care expenses in retirement.
The tax law allows you to do a one-time rollover from an IRA to an HSA, by turning tax-deferred retirement savings into an account you can tap tax-free. But the law is limited, and you need to follow a specific procedure to avoid an unexpected tax bill. Here you need to know.
How to roll money from IRA to HSA
Rolling on money from an IRA you can supercharge your HSA. It is a method of taking money that will be taxable upon withdrawal from a traditional IRA and lets you tax-free it for qualified medical expenses.
You can rollover only if you are eligible to make new HSA contributions, which means you must have an HSA-eligible health insurance policy with a discount of at least $ 1,400 if you have a family Only self-coverage or $ 2,800. Coverage in 2020 and 2021. The amount you can roll over from the IRA is limited to your maximum HSA contribution, which is $ 3,550 if you only have self-coverage or $ 7,100 for family coverage in 2020 (only for self-coverage $ 3,600) or $ 7,200 for family coverage in 2021). If you are 55 or older, you can contribute an additional $ 1,000 for the year.
The rollover only makes sense with a traditional IRA, which would otherwise be taxable, not Roth Ira, Which can already be withdrawn tax-free.
Any amount you roll reduces your maximum HSA contribution limit for the year. For example, if you only have self-health insurance in 2020 and you roll over $ 3,000 from an IRA, you can only contribute $ 550 to the HSA for the year. You can make an Iraq-to-HSA rollover only once in your lifetime, so you need to think carefully about the best time to make this move.
Who can get the most out of the IRA-to-HSA rollover?
Since rollover reduces the amount of new contributions you make for the year, it is usually better if you can contribute new money in exchange for an HSA. This way, you will get a tax break for your contribution, apart from Creation of tax-saving facility For future expenses.
“I think it’s better to make new contributions so that you can deduct tax instead of using IRA for HRA rollovers, but if money is tight or you have big expenses, rollovers are a good way to take care of that situation.” is.” “Says Roy Ramathoon, president of HSA Consulting Services.
Here are some situations where rollover can be particularly helpful:
Build your HSA balance, especially when you are starting out. Rita Asaf, vice president of retail health savings accounts for Fidelity Investments, says, “If you can’t contribute new HSAs and need money for qualified expenses, this funding method can help.” “This is particularly helpful in the first year of owning an HSA and you need to access funds for a qualified medical expense before you accumulate too much in your HSA.”
If you continue to increase the money in the account in future rather than using it for current medical expenses then you will get more tax benefits. Steven Hamilton, a nominated agent, says that Hamilton is the owner of Hamilton Tax and Accounting in Gresque, Illinois. “It allows the money to grow in the most convenient way.”
Providing a tax-free emergency fund. Those who have lost their jobs and need to use emergency cash can roll over money from traditional IRAs to HSAs and make it tax-free for out-of-pocket medical expenses. If they are receiving, they can also use money-tax-free to pay their health insurance premiums. Benefits of unemployment Or if they continue their employer’s health insurance on COBRA after losing their job.
“This may be most helpful to those who have recently lost their jobs and are now facing unemployment or COBRA premiums or large out-of-pocket expenses,” says Ramanthan. “If cash is difficult to come by, then transferring money from an IRA to an HSA may be the only ticket.”
Creation of health care savings as soon as retirement approaches. The HSA can be even more valuable after the age of 65, when you can also pay tax-free to pay premiums for Medicare Part B, Part D and Medicare Advantage plans (but Medigap). Also, HSAs do not require a minimum distribution, so you do not have to start withdrawing money from the account at age 72, like you would with a traditional IRA.
If you are 55 or older you can deposit more money in HSA – an additional $ 1,000 in catch-up contributions.
As you get closer to Medicare age, however, you need to beware of HSA rollovers. When you enroll in Medicare, you cannot make a new contribution to an HSA or roll over money from an IRA to an HSA. If you sign up for Medicare when you turn 65, your HSA contribution usually needs to be pre-determined based on the number of months before you are admitted to Medicare.
Some people who are still working for a large employer at age 65 sign up for Medicare until they are older, so they can continue to contribute to the HSA. This is usually only an option if you have health insurance from a current employer with 20 or more employees. But when you finally have to be careful Sign up for medicare After age 65, because you will receive six months of retrospective medical coverage at that point – and you cannot make HSA contributions for those months.
How to roll money from IRA to HSA
You need to be careful when you roll over money to avoid unexpected tax bills. “The key is that the transfer should be done directly through trustee-to-trustee transfer,” Asaf says. “You should not withdraw money before your IRA as it can lead to a taxable event and penalty.” Ask your HSA and IRA administrators for your procedure.
Since this is a one-time lifetime rollover, you cannot transact online even if HSA and IRA are with the same administrator. This is the case with Fidelity, for example. Asaf says, “You should call our HSA experts to ensure that IRA withdrawals are not treated as a taxable event and the money rolled into the HSA as HSA contributions to ensure that the transaction is handled goes.”
She says some administrators may require a paper form and others do not. She says, “The key is to ensure that the money rolled over from the IRA is treated as HSA contributions.” “Some HSA administrators may send trustee-to-trustee checks to you, and in this instance you might want to make sure that when you send a check to your HSA administrator to include a check or instruction sheet or deposit slip, it would indicate Is that the check should be treated as an HSA contribution. “
Keep in mind that both IRA and HSAs are individually owned, even if you are married. IRA and HSA must have the same account owner in order to roll out. “Unfortunately, you can’t take one spouse’s IRA and put it in the other spouse’s HSA,” he says.