The Health Opportunity Patient Empowerment Act of 2006 allows you a transfer of money from your individual retirement account (IRA) into your health savings account (HSA). This right is a one-time, penalty- and tax-free move.
Most medical scenarios would benefit you the most if you waited until retirement years to move the money. We’ll talk through a few caveats of the move.
The pros of moving IRA money to your HSA
- A rollover from a traditional IRA to an HSA allows you to “fill” your HSA immediately in order to pay for medical expenses tax free. Read more about the rollover rules and benefits.
- Provided you can avoid using the rollover funds until retirement, you will see a tax benefit. The IRA withdrawals after retirement are taxed (at a 24% marginal rate), but if you move the money to your HSA, you’ll accumulate more by letting the money grow at the 6% rate in an HSA.
- Doing the rollover is better than paying a penalty to withdraw from the IRA when you are under 59-1/2 to contribute to the HSA.
The cons of the rollover scenario
- You must be eligible for a high deductible health plan (HDHP) in order to contribute to an HSA.
- The law requires that you remain eligible for your HSA for 12 months following the transfer.
- The once-in-a-lifetime transfer from an IRA to an HSA does not increase your HSA contribution limit. This reduces the amount you can contribute in other ways, either directly or through your employer.