While an individual retirement account helps you sock away tax-free money for the golden years, health savings accounts do the same for medical expenses, no matter what your age is. The Internal Revenue Service sets the rules on IRAs and HSAs, including the limit of your yearly contributions and the law on rolling money from one account to another.
You can roll over funds from an IRA to the HSA once during your lifetime. The HSA must be eligible for contributions in the year you make the rollover, meaning there must be a high-deductible health insurance policy associated with it. As of 2013, the IRS considers a "high-deductible" to be $1,250 for an individual and $2,500 for a family.
The IRS sets the limits on IRA and HSA contributions. As of 2013, you can deposit $5,500 or your taxable compensation for the year into an IRA, whichever is less. This covers "traditional" IRAs, which allow you to deduct the contributions, and Roth IRAs, which can provide tax-free withdrawals as long as you keep the funds in the account for at least five years. The HSA limit is $3,250 for a single person and $6,450 for a family. IRAs and HSAs allow a $1,000 additional "catch-up" contribution for people age 55 and older.
The limit on your once-time IRA-to-HSA rollover is whatever the maximum annual contribution is in the year you do the rollover. As of 2013, that limit is $3,250 for an individual, plus another $1,000 if you're 55 or over. The family limit wouldn't apply because, as the name suggests, only an individual can own an IRA. You must subtract any contributions you made to the HSA for the year from the limit. The IRS allows annual HSA contributions up to April 15 of the following year, but the rollover only counts in the calendar year you make it.
If you're ever short of money for medical expenses, an IRA-to-HSA rollover might make sense. You also avoid the tax and possible early withdrawal penalty that happens if you just take the distribution from a traditional IRA. The problem is that you lose the tax deduction on money you may have been able to simply contribute to the HSA. If you roll over $3,000 from an IRA to an HSA, for example, you would only have a deduction available on $250 of new contributions to the HSA for the year. You also lose any tax-free growth you might have earned within the IRA.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.