Can You Rollover an Existing IRA Into an HSA?
HSA accounts are Health Savings Accounts. These accounts are tax-free savings accounts designed to help you save money for medical expenses. Your HSA account can be funded with cash contributions that are pre-tax, but you can also make a one-time transfer of funds from your IRA account.
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Purpose
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The purpose of transferring funds from your IRA to an HSA is to fund your HSA account with money that you won't need for retirement or that you need right away in your HSA account.
Limitations
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You can only make a one-time transfer from your IRA to your HSA. Your contribution limits are $3,050 for individual accounts and $6,150 for family accounts, as of 2010. If you transfer more than this into an HSA account, the transfer will be treated as an early distribution and included as taxable income. You will also be subject to an IRS 10 percent penalty if you are under age 59-1/2. Additionally, any contribution made from your IRA reduces the total contribution you can make from outside of your IRA by an equal amount. In other words, a transfer from your IRA counts as a normal contribution to the HSA.
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Benefit
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The benefit of transferring money from your IRA to an HSA is that you don't have to contribute any additional out-of-pocket money to your HSA account. Your IRA can fully fund your HSA in any given year.
Disadvantage
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The disadvantage to funding your HSA with an IRA is that you must remain as an eligible individual in regards to your HSA (you must keep your health insurance) for the following 12 months. If you do not, the HSA is closed and the amount transferred from your IRA is treated as an early distribution. If you are under age 59-1/2, you will have to pay a 10 percent penalty along with ordinary income taxes.
Considerations
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Make sure that you keep your health insurance if you plan to transfer money from your IRA to your HSA account. If you are not sure whether you will keep your job or keep your health plan for the next 12 months following the IRA transfer, then you should consider making contributions from your bank account instead of from your IRA.
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