The Internal Revenue Service allows many types of tax-advantaged accounts for retirement savings and health expenses. Individual retirement accounts allow you to invest money for your golden years. Health savings accounts let you sock away cash for qualified medical expenses. As long as you follow the rules, you can transfer part of your IRA balance to fund a HSA.
HSAs require enrollment in a high-deductible health plan. The minimum deductible required for single coverage is $1,200 a year, and family is coverage $2,400. The maximum out-of-pocket expenses are $6,050 for single and $12,100 for family coverage. Your health plan provider can tell you whether your health plan is considered a high-deductible plan for HSA purposes.
IRA-to-HSA rollover transfers are only allowed with specific IRA accounts. You can roll over a traditional IRA or a Roth IRA balance to a HSA. You cannot roll over an ongoing SIMPLE IRA or SEP IRA to an HSA.
HSAs have yearly contribution limits depending on your type of health coverage. According to the Kiplinger, you can roll over an amount equal to the HSA yearly contribution limit or less. For 2013, you can contribute $3,250 for single coverage and $6,450 for family coverage. You can increase that by a $1,000 a year if you are 55 or older.
The IRS only allows an IRA-to-HSA once in your lifetime. The rollover must go from an IRA in your name to an HSA in your name. You cannot roll over your IRA to an IRA in your spouse's name. Once the transfer is complete, you must remain enrolled in a high-deductible health plan at least one year. If you quit your health coverage, your rollover may be taxed as an early withdrawal and hit with a 10 percent early withdrawal penalty.
You cannot be the middleman in the rollover process. Instead, you must use a direct transfer between the custodians of the two plans so the money never hits your hands. Contact your IRA and HSA custodians to start the transfer. Failure to do a direct transfer results in income taxes on the rollover amount and possibly an early withdrawal penalty.
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