Health Savings Accounts (HSAs) are very popular among those with high deductible health plans (HDHPs). A person enrolled in a qualified HDHP can open an HSA and use the account to cover a large variety of out-of-pocket healthcare expenses. In addition, HSA owners can take advantage of triple tax savings – tax-free funding, tax-free interest, and tax-free distributions for qualified expenses. HSA funding, for some people, may cause some concern; one condition with an HSA is that account owners can only spend their accrued balance (unlike with a Flexible Savings Account). There is a little known HSA funding trick, however, that owners may be able to take advantage of.
When it comes to funding, account owners have a couple of options available. Most people make a payroll deduction each payday, though you can also fund the account through a post-payroll deposit. However, if you’re new to an HSA or have a low balance, building up the account may be challenging.
However, there is another option allowed by the IRS if you own a traditional IRA or Roth IRA. According to IRS Publication 969, “a qualified HSA funding distribution may be made from your traditional HRA or Roth IRA to your HSA.”
If you decide to use your IRA for an HSA distribution, you can only do it once in your lifetime, with one exception. If you make a distribution during a month in which you have self-only HDHP coverage, you can make another qualified HSA funding distribution in a later month in the same tax year if you change to family HDHP coverage.
In 2019, if you have single coverage through a qualified HDHP, your maximum annual contribution is $3,500 ($291.66 per month); for those with family coverage, it’s $7,000 ($583.33 per month).
This is the total HSA contribution you can make for the year, with or without using your IRA.
For those who are age 55 or older, they can use their catch-up contribution amount to add an extra $1,000 to the annual HSA contribution limit. That amounts to $4,500 for self-only coverage; $8,000 for family coverage.
Since you can only use this strategy one time, and it counts toward your annual maximum contribution limit, it’s important to think about how you can maximize this trick. Here are some valuable reasons to use the qualified HSA funding distribution:
The qualified HSA funding distribution is a little known IRS provision, but it can be very useful depending on your financial situation. Contact your tax advisor or benefits administrator for more information.