Moving money is always complicated and never straightforward. It requires you to know what you are doing and if you make a mistake, the IRS imposes steep penalties.
HSA Rollovers and Transfers Details
There is no industry standard for an HSA transfer. Unfortunately, it’s true. There is no industry standard for how it should be done. Most providers leave it to you to determine how to handle it. No wonder so many people are left dazed and confused about their options. As of today’s date, we have done transfers from over 90 different HSA providers – and not surprisingly, each one is different! You can roll your funds to a new provider (rollover) or make a trustee-to-trustee transfer. Additionally, once in a lifetime, you can move funds from an IRA into your HSA. Further, if you have funds invested, in some cases, you can even make an in-kind transfer. Yes, we know – it’s complicated. We dive into more detail for each option below and hopefully one of these scenarios may be applicable to you.
The IRS allows each HSA account holder to “roll over” their funds to a new HSA provider every 12 months and maintain the tax-advantaged status of the HSA. If you request a “rollover,” the HSA custodian will send the funds to you via check or transfer to your personal bank account (not your HSA). Once you have the funds in your possession, the critical thing to keep in mind is that you have 60 days from receipt to deposit those funds into a new HSA custodian, otherwise it will be considered a taxable distribution which means you pay ordinary incomes taxes + a 20% penalty! When done properly, these funds are not included in your taxable income and it does not reduce your contribution limit for the year. Pro tip: Lively can make simplify this process for you (just ask us how).
HSA Trustee-to-Trustee Transfer
Unlike a rollover, a trustee-to-trustee transfer can happen as often as you’d like. The transfer happens directly between the providers/custodians – you don’t touch the money at all. You simply need to go to the provider where you want your funds transferred into and ask them for a trustee-to-trustee transfer form. Simply fill out the information requested and your provider should take care of the rest. When done so properly, you avoid any kind of tax and penalty. The transferred amount is not included in your annual income, doesn’t count towards your annual contribution, and is not considered a distribution.
IRA to HSA Transfer
This is a little-known fact. The IRS has made it so that once in your lifetime (yes, I said lifetime), you are able to move funds from your Individual Retirement Account (IRA) to your HSA. This is incredible. Mainly because you are able to achieve an extra tax advantage and if done so properly, that could be a material difference – say over a 20-30 year period.
Here is what you need to know regarding an IRA to HSA:
- As mentioned before, it can only occur once per lifetime
- The IRA and the HSA must be in the name of the same person
- Traditional and Roth IRAs are straight forward. SEP or Simple IRAs are a bit more complicated.
- Most importantly, any transfer that takes place counts towards your annual contribution limit. This means that in the year that you do the transfer, you must be eligible to contribute into an HSA, and you probably want to wait until you have a good idea you will be eligible for twelve full months to take full advantage of this one-time opportunity!
In-Kind HSA Investment Transfers
If you have your HSA funds invested in liquid securities (e.g., stocks, bonds, mutual funds, ETFs, etc.), you can inquire about an in-kind transfer. This is when the investment partner where your HSA funds are invested will transfer all your existing positions to the investment partner of your new HSA provider. Be warned that not every HSA provider allows for this. For those who don’t allow your funds to be transferred out using an in-kind transfer, unfortunately, you will need to liquidate your funds before moving them. This is particularly unfortunate because in certain states (e.g., California), any interest, dividends, realized gain, etc. is considered taxable income and you’ll have to pay state taxes.
If you are a Lively account holder and you want to do an in-kind transfer, simply email us and we can take care of the process for you.
- You do not need to be on an HSA-eligible High Deductible Health Plan, to rollover or transfer your funds. These options are available to you so long as you have any HSA funds in your account.
- When you finally do initiate a transfer or rollover, expect the process to take 2-6 weeks! Yes, this is also absurd, however if you are an institution whose lifeblood is deposits and those deposits are leaving your organization, why would you be in a rush to help move money away? The initial reaction might be because it is the right thing to do, however, it is more often the exception than the rule that people treat departing customers the same as they do new customers. We all have long memories and we believe that our reputation over a long period of time than is more important than squeezing out the last penny from a customer. Pro Tip: If you find yourself waiting for a transfer to be completed, you can try calling your existing provider and asking them for a status check. They will only be able to speak to the account holder.
- Be on the lookout for fees! Most providers charge you fees to transfer money out of your account (their institution). This fee can be in the $25-$50 ballpark. All providers talk about how they don’t charge fees to accept an incoming transfer/rollover, but they never make it easy to find information about transferring/rolling money OUT to a different provider. This is frankly why we started Lively – we were sick and tired of providers nickel and diming users, so we decided to do something about it. We don’t hide behind a fee schedule. We don’t have one.
- Our mantra is simple. If we are not performing as an organization or up to your standards, you should be able to take your money with you elsewhere – free of charge. See our values here.
We hope that the industry can change for the better, but it has a long way to go. At Lively, we will lead with our actions and hope everyone else can follow with some.
Note: none of the above should be considered tax or investment advice. Please seek a tax or investment professional to determine the best course of action for your situation.
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.