Trustee-to-Trustee Transfer vs. Direct Rollover: Which is the Safest?

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Transferring funds from one account to another can be a hassle - even more so when taxes are involved. What can you do to minimize penalties and headaches?

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Editor’s note: Because you need to know the safest and easiest way to change HSA providers, and the difference between an HSA transfer and rollover, we’ve written a newer blog post: “HSA Transfer vs Rollover: Which is the Safest and Easiest Method?”

Are you ready for a new health savings account, but nervous about making the switch? It's normal to feel uneasy about the logistics of moving accounts, especially when the stakes are high. One wrong move could trigger an unexpected tax bill—with a costly penalty, to boot. The best way to avoid trouble from Uncle Sam is through a health savings account transfer or rollover. We’ll cover two options to help you decide which is best for you.

Pay attention to the 60-day rule

Health savings accounts are popular because of their triple-tax benefits. You can make contributions before taxes, grow the money tax-free, and make withdrawals anytime for qualified medical expenses. But if you use the money for any other purpose, you will have to pay regular income taxes on the withdrawal, plus an extra 20% penalty.

When changing health savings accounts, you'll have the task of moving the money to a new company. Your original provider can send you a check with the balance, but you’ll have to open the new account quickly. As long as the transfer happens within 60 days, the IRS won't consider it a withdrawal. But if it takes any longer, you'll owe income tax and a 20% penalty on the balance.

Luckily, you can bypass this risk—and avoid a mandatory 20% tax withholding from your original company—by completing a trustee-to-trustee transfer.

What is a trustee-to-trustee transfer?

Changing from one health savings account to another is a major decision. When you're finally ready to move the money, you can do it with a trustee-to-trustee transfer. This is one way to avoid the risk of taking longer than 60 days to move the money—and paying income tax and penalties on the transaction.

With a trustee-to-trustee transfer, your first health savings account provider makes a direct payment from your original account to the new one. The transaction will be faster than depositing the money yourself with a direct rollover. Plus, there won't be a mandatory 20% tax withholding.

What is a direct rollover?

A direct rollover, which involves receiving a check, is another way to move the money. This can be a hassle, because it is now entirely in your responsibility to transfer these funds to a new provider - which can easily be forgotten.

Once you receive the check, it's your responsibility to deposit the money within 60 days. If you miss the deadline, you can expect to pay income taxes plus a 20% penalty on the remaining balance. If you decide to take the risk of a direct rollover, contact your health savings account provider for the complete instructions.

Which option is the safest?

While it may be tempting to do it yourself, it's always better to rely on a trustee-to-trustee transfer. Not only will it happen faster, but you can skip the frustration of a mandatory 20% tax withholding. Plus, you may rest easier knowing the task of moving the money is out of your hands.

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.

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