By: AnnaMarie Mock, CFP®
In the past, we have discussed the benefit of a Health Savings Account or HSA. As a refresher, HSAs are designed for an individual or family to save pre-tax money up to the annual limits for either short-term medical expenses or long-term retirement planning.
Overall, it is more advantageous to contribute new monies into an HSA to get a tax deduction in the year of the contribution and continue to build your wealth over time.
2020 HSA Maximum Contribution Amounts
The 2020 HSA maximum contribution amounts have increased as follows:
HSA Rollovers
In addition to HSA contributions generated by cash flow, you can, also, rollover money from your IRA to your HSA up to the annual contribution maximum if you:
have a high-deductible health plan, HDHP
are below the age of 65.
This strategy allows you to transfer money that would have been included as taxable income at withdrawal and convert it to tax-free funds available for qualified medical expenses.
In some instances, this can be a viable method to access money that would otherwise be taxable.
Tax-Free Medical Emergency Fund: Rolling money from a traditional IRA into an HSA for short-term medical expenses can be utilized if all other avenues are explored. By doing so, this can provide capital for an unexpected expense without the need to use debt.
Although this has its benefits, we do recommend having an established emergency fund on hand at all times to eliminate the need to use investment capital. A genuine emergency fund is a vital component of a financial plan.
Building Savings Near Retirement: HSAs do not require required minimum distributions (RMDs), unlike IRAs. You can circumvent additional taxable distributions by transferring prior to age 65 and allowing the HSA monies grow tax free. Not only is the transfer amount excluded from taxable income at age 72, but all of the future gains are now treated as tax-free (if used for qualified medical expenses).
There are some caveats to this strategy:
The transfer from the IRA has to be a direct rollover into the HSA, meaning the IRA account holder cannot gain immediate access to the funds
The rollover is not tax-deductible, but you do not have to pay tax on the amount. Only regular HSA contributions are tax-deductible in the year of the contribution.
Roth IRA assets are eligible for the HSA rollover. However, because Roth IRAs are funded with after-tax contributions, you will not be taking advantage of recharacterizing it to be tax-free monies.
It is a requirement to stay covered under a HDHP for at least 12 months after the rollover. If you fail to do so, the transfer amount becomes taxable, and a 10% penalty is applied.
You may only rollover to an HSA once in your lifetime.
If you have any questions, please do not hesitate to reach out to the HIGHLAND team.
Author’s Bio
AnnaMarie Mock is a CERTIFIED FINANCIAL PLANNER™ and Partner at HIGHLAND Financial Advisors, LLC, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, employer retirement planning, and investment management. AnnaMarie graduated from Montclair State University with a degree in finance and management and successfully passed the CFP® national exam in 2016. She has been working at Highland Financial Advisors since 2013 as a fee-only, fiduciary Wealth Advisor and is a member of NAPFA.