Trouble funding your HSA (health savings account)? Why not do an IRA to HSA conversion? Remember, the health savings account (HSA) allows you to use the funds for medical expenses TAX-FREE AND withdraw them for any reason after age 65 with only ordinary income tax due – not a bad deal right?


IRA To HSA Conversion Rules

The kicker is you need to have an HDHP (a high deductible health plan – cheat sheet is here) to have a health savings account. Once you have that set up, you can convert your annual limit in dollars minus any HSA contributions made for the year (2016 numbers):

  • $3,350 for individuals
  • $6,750 for a family

The thing is you can only take advantage of this once, and you must make the IRA to HSA conversion in the calendar year you’re in (unlike funding an HSA where you have until your tax filing due date). The IRS doesn’t want you converting this every year and building up a massive HSA because they may end up losing out on a lot of tax dollars if you use the health savings account correctly (for qualified medical expenses). Since it’s a one time deal, it’s best to be certain it’s the right move for you!

One nice benefit (in addition to the tax savings over time) is HSA’s have no required minimum distributions. Any IRA to HSA conversions will reduce your ultimate RMD’s, and may end up saving taxes in the process.

Remember, under current law your non-spousal IRA beneficiaries can stretch their distributions out over their lifetime. This isn’t the case with HSA’s. You’ll want to spend your health savings accounts down before you die because these accounts must be distributed after. An IRA or Roth IRA however is a great way to stretch the tax advantages out for a generation or more!