The HSA Rollover: a Once in a Lifetime Opportunity

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By James Nay, Client Representative 

As a client representative at New Direction, one of the most common questions we receive from our HSA account holders is, “How do I fund my HSA?”

Normally, funding an HSA comes with a few different options such as transferring funds from another HSA account to your NDIRA account, or making a contribution according to normal HSA contribution limits from your personal funds (found here).

But what if a client has a different type of qualified plan (such as an IRA or 401k plan) from which they want to move funds?

The Rollover

Investors can fund their HSA with a "once in a lifetime" rollover from a different type of qualified retirement plan, such as a Traditional IRA, Roth, 401k and so on. Once an investor has used this special rollover, they will not be able to use it again. Investors should use this rollover wisely and consider the facts for their particular situation to see if funding their HSA with this strategy is the best option for them.

A rollover usually refers to the movement of IRA funds from one IRA provider or qualified retirement plan (401(k), 403(b), defined benefit plan, and more) to the account owner, who then deposits the funds into a new IRA with a different IRA provider. The account owner has 60 calendar days to complete this move. If the process is not completed within 60 days the value of the cash and/or assets are considered a taxable distribution of funds. Rollovers are reported to the IRS. If performed properly, rollovers are not a taxable event.

When doing a rollover to a HSA, there are specific limitations investors must comply with:

1. The amount being deposited into the HSA cannot exceed the maximum contribution limit for the HSA account (for HSA contribution limits, click here);

2. Investors cannot perform this rollover from an ongoing SEP IRA or SIMPLE IRA. According to IRS Publication 969,  “a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within your tax year in which the [Rollover] would be made.” 

3. If an investor uses the once in a lifetime rollover, it will be calculated as if it were a contribution to the account. This means if the investor rolled over the maximum amount as described above, they will not be able to make a contribution for the same year.

4. Normal rollovers only allow an investor one rollover per year (with IRA accounts). The once in a lifetime rollover from an IRA account counts as the rollover for the year.

5. If an investor opens an HSA in the middle of a tax year or later, they can contribute/rollover the annual maximum for that partial year, as long as they stay covered by an HDHP for twelve consecutive months. (Failure to stay covered by an HDHP for the requisite twelve months results in the need to file a form 5329 with personal taxes.)

Pros and Cons

When considering the once in a lifetime rollover as an option, it's important to weigh the pros and cons of this  strategy. Each individual case varies, and it is up to the investor's discretion to determine their best option. One reason to consider this funding mechanism might be if an investor incurs an health expense at the onset of opening their HSA that would serve a financial blow if forced to pay out-of-pocket. In this situation, the investor would be left to come up with the deductible on their health plan, although they have the necessary funds available in a different type of retirement account. Using this rollover option, an investor could feasibly reduce the out-of-pocket expense without having to pay directly from personal finances.

There are also the following (and far more common) pros and cons that most clients consider when funding an account this way:

Pros:
  • Alternative to making a contribution
  • Allows other options when funding an account
  • Funds coming out of your IRA are not subject to early distribution penalties (even if you are under 59 ½)
  • Many CPAs and even other HSA providers are not well-versed in this specific provision
Cons:
  • Subject to HSA Contribution Limits
  • Only usable once in a lifetime

Required Forms and Step-by-Step Procedure for Once in a Lifetime Rollover

*Please note: Not all custodians are the same, meaning required documents may differ. Contact your representative for more information.

1. Open a New Direction HSA account (you can fill out an online application here)

2. Contact your other custodian to initiate a rollover

3. Fill out a rollover certification form (found here) and submit back to New Direction IRA

4. Deposit funds back to New Direction IRA within 60 calendar days of initiating the rollover to avoid any tax liability

More Information

* HSA accounts

* Publication 969

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