A Health Savings Account (HSA) allows you to set aside money for qualified medical expenses on a tax-free basis. But not all HSA providers are equal. That’s especially the case when it comes to fees, investment options, accessibility and customer service.
If you’re unsatisfied with your current HSA custodian, you can roll your funds over to a new provider. That process might sound complicated, taxing and frustrating.
In the right scenario, it can give you the chance to save more money and give you access to other features like investing. The long-term value that comes from improved features can make the effort well worth it.
If you’re thinking about rolling over your HSA money, here’s what you need to know.
Reasons to Consider a Rollover HSA
There are many reasons to roll over your HSA to a new provider.
One common example is switching from an employer-sponsored HSA to one of your choice. When you leave your job you might not be able to take your health insurance, but you can take your HSA with you.
Some people learn about providers that offer features that better align with their financial goals. Not all HSA providers provide the ability to invest, and that can be a dealbreaker for some.
Regardless of your situation, it’s crucial that you make sure you’re getting the best value at the lowest cost. With the right provider, you can maximize the return on investment over the long run with your HSA funds.
Can I Have Two HSAs?
There is a common misconception that you can only have one HSA, but that’s not the case.
Let’s say you’ve opened an HSA account on your own or have one from a previous employer. If you join a new company and it offers an HSA contribution benefit, you don’t have to get rid of your old account.
Let's look at a different scenario. Say your employer offers HSA contributions with its chosen provider but you want better features. That can include things like no fees, self-directed trading or other investment options. In this situation, you’re allowed to open a separate HSA on your own and use both.
In other words, having two HSA accounts can be a good option in certain situations. One case where it might not make sense is if you’ve left your employer and no longer get HSA contributions as a benefit. When this happens, it may be better to join your funds into a single account for convenience.
Remember, though, that your annual contribution limit is on a per-person basis and not per-account. Whatever the contribution limit is for the current tax year, that’s your total limit across all HSA accounts.
Rollover HSA Rules to Consider
Before we dig into the tax implications of moving funds from one HSA custodian to another, it’s important to define the terms.
An HSA rollover is a transfer from a trustee (like a bank, financial institution or HSA provider) to the account holder. The account holder then deposits the money with the new trustee.
A trustee-to-trustee transfer occurs when one provider transfers your HSA funds directly to another trustee. Other than making the request, the account holder doesn’t have to do anything.
With a HSA rollover, it’s important to know that you can do it only once every 12 months and still maintain the account’s tax-free status. This rule isn’t defined by the plan or calendar year period, but rather on a 12-month rolling basis.
Once you receive your HSA rollover, you have 60 days to deposit your HSA funds in your new HSA, according to IRS guidelines. If you don’t complete the process, the funds are considered taxable income, and you’ll also be subject to a 20% penalty.
If one trustee is transferring funds to another, it doesn’t count against your 12-month rollover limit. There’s no potential for the funds to be taxed because they never touch your hands.
As a result, while you might have completed your once yearly HSA rollover, you still could be eligible for an HSA transfer.
One-Time Transfer of Funds From an IRA to an HSA
The primary type of rollover HSA involves two HSA accounts. It’s possible for account holders to roll over funds from their individual retirement account (IRA). But there are some caveats with this option:
- You can only transfer funds from an IRA to an HSA once in your lifetime.
- Your transfer is limited to the contribution limit for the tax year in which you request the rollover. For 2021, that’s $3,600 for folks with self-only health plans and $7,200 if you have a family health plan.
- You must be on an HSA-eligible high deductible health plan (HDHP) for 13 consecutive months. That timeline begins with the month of your IRA transfer. Otherwise, the transferred amount may be subject to income taxes and a 10% penalty.
- SEP IRAs and SIMPLE IRAs are not eligible for this type of transfer
This can be especially beneficial if you have money in a Traditional IRA. IRA funds are taxed on a deferred basis. This means your contributions are deductible for the tax year in which you make them.
They're then taxed when you take withdrawals in retirement. When you transfer funds from a Traditional IRA to an HSA, you get a break on your tax return. This is because you're converting taxable funds into tax free funds.
If you have a Roth IRA, the funds are already growing tax-free, so it may not make as much sense. The exception is if you need the money now for medical bills and don’t have a Traditional IRA.
How to Rollover or Transfer your HSA to Lively
Rolling over your HSA sounds like a complicated process, so we decided to simplify it for you. Here is what you need to do:
- Sign up for Lively and complete your enrollment – we are free for individuals.
- Complete your online HSA rollover form (as part of the onboarding process).
And that’s it! Lively will take care of the rest for you and let you know when the money is in your account.
The Bottom Line on HSA Rollovers
If you’re thinking about switching HSA providers, make sure you understand the potential pitfalls. If you don’t, it could cost you. For starters, trustee-to-trustee transfers are generally the best way for transferring funds. These transfers don't need you to handle the money. Plus, they’re not subject to annual limits or potential tax problems.
If you have an IRA, particularly a traditional one, consider an IRA-to-HSA transfer. In the right situation, it could allow you to take advantage of more tax savings. Before you do, though, consult with a tax professional to ensure it’s the right move for you.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.