CPA & Business Advisory Blog

Using your IRA to Fund your HSA

In trying economic times, using your Individual Retirement Account (IRA) to fund your Health Savings Account (HSA) is a possible strategy for anyone wishing to fund his or her HSA without having to tap into current cash flow. A provision of which you may not be aware in the Tax Relief and Health Care Act of 2006 allows individuals to use their IRA to fund their HSA.  Generally, any individual eligible to have an HSA may take a distribution from his or her IRA and fund  their HSA. 

Internal Revenue Code section 408(d)(9) provides, in general, that a qualified HSA funding distribution from an individual’s IRA to that individual’s HSA is not included in gross income.  Furthermore, qualified HSA funding distributions are not subject to the 10% penalty for early withdrawal.  Keep in mind that if a taxpayer elects to do this, the contribution to the HSA is not deductible on that individual’s income tax return.

This funding distribution can only be made from a traditional IRA or a Roth IRA.  This qualified distribution must be less than or equal to the IRA account owner’s maximum annual HSA contribution.  For example, an eligible individual with family coverage under a high deductible health insurance plan may take a qualified HSA funding distribution of up to $6,150 in 2010.

Note that this must be a direct transfer from the IRA to the HSA, and may only be done once in the taxpayer’s lifetime.  This could be a good tax saving tip, as the distribution from your IRA is not taxable, and any amounts distributed out of an HSA are not taxable, as long as they are used for qualified medical expenses.  Further, if the funds in your HSA are not distributed, the value of the account can continue to grow tax-free.

For more tax planning strategies and investment advice, contact Skoda Minotti at 440-449-6800.

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