Can you really make your IRA dollars tax-free?

If you’re an avid, or even occasional, reader of personal finance books, magazine articles or blog posts, you’ve probably come across this topic.

If not, your first reaction may be, “Since there’s no such thing as a free lunch, what’s the catch”? Let’s first review what it is, and how it works and, finally, what to watch out for.

What it is
If you qualify (see below), it’s possible to make a one-time conversion of dollars in your Individual Retirement Account (IRA) to your Health Savings Account (HSA). If used for medical care expenses, HSA dollars may be withdrawn tax-free.

How do I qualify
You must be eligible to make contributions to your HSA, by being covered by a high-deductible health plan. You must also remain eligible for your HSA for 12 months following the IRA-to-HSA transfer. This means that you must stay in the high-deductible health plan for at least a year after the transfer.

How does it work

If you’re unable to make the maximum contribution to your HSA in any given year, you can roll over dollars in your IRA over to the HSA. Dollars in the HSA benefit from tax-free growth and, if used for qualifying medical costs, tax-free withdrawal.

What to watch out for
You can only roll over funds from your IRA to your HSA once during your lifetime. Your rollover is limited to the maximum permitted HSA contribution for the year: for 2019, $3,500 for single coverage and $7,000 for family coverage, with a special $1,000 catch-up contribution for those over the age of 55.

Any employer contributions to your HSA count toward the annual maximum contribution, and so would reduce the amount you could roll over from your IRA.

An HSA deduction isn’t allowed for the amount transferred from your IRA to your HSA.

SEP IRAs and Simple IRAs don’t qualify for rollover to your HSA.

HSAs and IRAs are individual accounts. There is no such thing as a joint IRA or a joint HSA. This means that you and your spouse can each roll over funds from your respective IRAs to your own HSAs, but not to each other’s. You can, however, pay medical expenses for each other (or family members) out of either account.

As with all matters tax-related, you should consult your CPA or financial advisor with any questions and before taking any action.

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