By now, you’re probably familiar with the two most common ways to fund your HSA: contributions paid directly from your employer, withdrawn pre-tax from your paycheck, or deposited post-tax automatically from an account of your choice. But there’s another way to fund your HSA that also utilizes pre-tax money: a qualified HSA funding distribution (QHFD), also known as a qualified funding distribution (QFD) or HSA funding distribution (HFD), from your IRA.
How Does a QHFD Work?
A QHFD is when you roll pre-tax contributions you’ve made to your IRA (Traditional IRA, Roth IRA, Inactive SEP or SIMPLE IRA) into your HSA. The distribution must be made on a trustee-to-trustee basis, which means the trustee of your IRA sends the money directly to the trustee of your HSA without using you as the intermediary. Since there is a maximum contribution limit to your HSA, the distribution from your IRA can’t exceed the difference between your annual limit and the contributions you’ve already made for that year.
That means if you’re planning to roll over money from your IRA this year (2020), your total contributions (those from you, your employer and your IRA) can’t exceed $3,550 if you’re on an individual plan, $7,100 if you’re on a family plan and if you’re 55 or older, you can add an additional $1,000 to those numbers. So if you’re a 35-year old on an individual HDHP, and you and your employer combined have contributed $1,000 to your HSA, your IRA distribution can’t exceed $2,500.
How to Report an IRA Contribution to Your HSA on YOur Taxes
If you use your IRA to fund your HSA, it’s really two transactions (a distribution and a contribution) so you’ll have to use two tax forms to report them to the IRS:
- For the IRA distribution use: Form 1099-R
- For the HSA contribution use: Form 5498-SA
Things to Remember When Using Your IRA to Fund Your HSA
- You can only perform this action once in a lifetime. Make sure you choose the timing that works best for you. That also means if you have multiple IRAs, you can still only make the transfer once. So you a) want to choose the IRA from which you’ll take the distribution carefully, and b) if none of your IRAs have the amount of money you want to contribute to your HSA, you’ll have to first transfer the delta from one (or multiple) IRAs to the account from which you’ll distribute.
- Only pre-tax money can be transferred from an IRA to an HSA. If you have a Roth IRA, that means only the earnings on your contributions are able to be distributed.
- Set up the transfer as a trust-to-trust transaction. If you fail to set up the transfer as a trust-to-trust transaction, and instead have the IRA funds distributed to you, and then you contribute those funds to your HSA, the IRA distribution will be taxed as income and you’ll have to pay an additional 10% early withdrawal penalty.
- You must remain eligible to contribute to your HSA for 12 months following the transfer from your IRA. If you don’t remain eligible, for reasons other than dying or becoming disabled, the distribution will be taxed as income and you’ll also have to pay the aforementioned 10% early withdrawal penalty.
- You can’t exceed the maximum contribution for the year. Once you reach the maximum allowable HSA contribution amount for the year, you cannot make any more contributions to your HSA pre-tax.
- The one-time IRA rollover to your HSA is not subject to the pro-rata rule. The pro-rata rule (sometimes called the “cream-in-coffee” rule) applies only to distributions from Traditional IRAs and says that once pre-tax and after-tax contributions are commingled in the same account, they can’t be separated. In most cases, if you take a distribution from a traditional IRA, you can’t just take it from the portion of the money that was contributed post-tax (and would therefore not be subject to the same income tax that you would pay on a pre-tax distribution).
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.