IRA to HSA Rules
IRAs are Individual Retirement Accounts. These accounts are meant to provide you with savings for your retirement. But, IRAs may also be used to fund an HSA. An HSA is a Health Savings Account. These accounts are part of a high deductible health plan. The savings account provides a way to defray the high deductible. Make sure you understand how the IRA to HSA rules work so that you do not subject yourself to IRS penalties.
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Process
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The process for moving money from an IRA to an HSA requires a transfer form from your IRA custodian. Your IRA custodian is the institution that holds the IRA for you. Normally, this is a bank, brokerage firm or insurance company. You are allowed to make one lifetime transfer of funds from your IRA to your HSA. The maximum contribution limit as of 2010 is $3,050 for individuals, and $6,150 for families.
Significance
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The significance of making this contribution is that you are moving money from your retirement account to a tax-free savings account. The money in the HSA may only be used to fund health care costs, including doctor's visits or payments toward the deductible on your health plan.
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Benefit
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The benefit of transferring money from your IRA to your HSA is that you don't need to take any additional money out of your own pocket to fund the HSA. This may reduce the financial burden of having to contribute to your health plan. Additionally, the contributions to the HSA account may be either tax deductible or pretax. This is because the HSA account is a tax-free savings account.
Disadvantage
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The disadvantage to contributing money to your HSA from your IRA is that you are only allowed a one-time transfer. Additionally, you cannot move the money from the HSA back into the IRA account. You may only use the HSA funds for medical expenses, so if you end up needing the money you transfer into the HSA later, you won't have access to it.
Considerations
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Before contributing to the HSA account, consider whether you will use the money in your HSA. If you rarely visit the doctor, you may want to keep your HSA contribution low. This is especially true if your IRA investments are not doing well. If you have both a traditional IRA and a Roth IRA, consider rolling money over from a traditional IRA since HSAs are tax-free and contributions to your traditional IRA are tax deductible.
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