HSAs - Rollovers

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willyd123
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HSAs - Rollovers

Post by willyd123 » Fri Aug 10, 2018 8:44 am

Bogleheads:

You may know that you are entitled to a once in a lifetime rollover from an IRA into an HSA up to the annual HSA contribution limits. You could actually do two rollovers (one each for husband and wife but into separate HSAs). So my question is which is the better option of the following:

1. Contribute from after tax sources into an HSA and get the tax deduction for that year (i.e. not a IRA rollover). This would reduce your income tax by your marginal tax rate and fund your HSA to cover medical expenses tax free.

2. Rollover dollars from an IRA into an HSA. This would reduce RMDs (not by much), would fund your HSA for qualified medical expenses but you would not get the tax deduction like in #1 but you would convert what would've been a fully taxable distribution from your IRA into a completely tax free asset (assuming you pay for qualified medical expenses).

Which is better?

MichCPA
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Re: HSAs - Rollovers

Post by MichCPA » Fri Aug 10, 2018 8:53 am

willyd123 wrote:
Fri Aug 10, 2018 8:44 am
Bogleheads:

You may know that you are entitled to a once in a lifetime rollover from an IRA into an HSA up to the annual HSA contribution limits. You could actually do two rollovers (one each for husband and wife but into separate HSAs). So my question is which is the better option of the following:

1. Contribute from after tax sources into an HSA and get the tax deduction for that year (i.e. not a IRA rollover). This would reduce your income tax by your marginal tax rate and fund your HSA to cover medical expenses tax free.

2. Rollover dollars from an IRA into an HSA. This would reduce RMDs (not by much), would fund your HSA for qualified medical expenses but you would not get the tax deduction like in #1 but you would convert what would've been a fully taxable distribution from your IRA into a completely tax free asset (assuming you pay for qualified medical expenses).

Which is better?
If you have after tax money for option 1, why would you do number two? In number one you get a deduction and no tax later. In 2 you already have a deduction and you get no tax on the way out. If number 1 is a viable option, you are putting that after tax money in a taxable account in scenario 2. Maximize your tax advantaged space and choose number 1.

willyd123
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Re: HSAs - Rollovers

Post by willyd123 » Fri Aug 10, 2018 8:59 am

I agree. That's why I was asking.

MichCPA
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Re: HSAs - Rollovers

Post by MichCPA » Fri Aug 10, 2018 9:10 am

To be honest, I feel like the rollover provision is designed for people who have a medical emergency and need the withdraw IRA money without getting destroyed by taxes. Generally, I don't think HSA rollovers are a great strategy if you are in the "I've maxed all my other options and I want to hide more money" group you see here. It's a one time deal that isn't a net contribution to your tax advantaged space. If you are the type of person who knows to ask this question, it probably doesn't make sense for you.

aristotelian
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Re: HSAs - Rollovers

Post by aristotelian » Fri Aug 10, 2018 9:34 am

MichCPA wrote:
Fri Aug 10, 2018 9:10 am
To be honest, I feel like the rollover provision is designed for people who have a medical emergency and need the withdraw IRA money without getting destroyed by taxes. Generally, I don't think HSA rollovers are a great strategy if you are in the "I've maxed all my other options and I want to hide more money" group you see here. It's a one time deal that isn't a net contribution to your tax advantaged space. If you are the type of person who knows to ask this question, it probably doesn't make sense for you.
+1, I would rather expand my pre-tax space and keep my lifetime rollover exemption in my pocket in case I need it in the future. If I was already retired my answer might be different.

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tfb
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Re: HSAs - Rollovers

Post by tfb » Fri Aug 10, 2018 9:34 am

willyd123 wrote:
Fri Aug 10, 2018 8:44 am
2. Rollover dollars from an IRA into an HSA. This would reduce RMDs (not by much), would fund your HSA for qualified medical expenses but you would not get the tax deduction like in #1 but you would convert what would've been a fully taxable distribution from your IRA into a completely tax free asset (assuming you pay for qualified medical expenses).
This is a common misunderstanding. By losing the deduction, you effectively accelerate the fully taxable distribution from your IRA. You are not avoiding the tax. You are paying the tax now. Converting to Roth + contributing to the HSA normally beats this IRA-to-HSA rollover every time, except when you absolutely have no money to contribute to the HSA.
Harry Sit, taking a break from the forums.

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grabiner
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Re: HSAs - Rollovers

Post by grabiner » Fri Aug 10, 2018 9:04 pm

The two strategies are essentially equivalent in most situations. You can contribute $3450 to your IRA and then roll $3450 from your IRA to your HSA, or contribute $3450 directly to your IRA. Both have the same effect.

Contributing directly to the HSA is better if you can still contribute to your IRA and 401(k), because it gives you more tax-deferred savings. It is just as good if you have to reduce your contributions by an equal amount. The only advantage of the rollover is in a situation in which you are under 59-1/2 and can't make the HSA contribution at all; if you withdrew from the IRA and contributed to the HSA without a rollover, you would owe a 10% penalty.
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Re: HSAs - Rollovers

Post by Spirit Rider » Fri Aug 10, 2018 11:26 pm

An IRA -> HSA rollover is also subject to a testing period of the entire following year. If you fail the testing period the rollover is subject to a 10% penalty.

The only time such a rollover makes sense is when you are < 59 1/2 and have no other way to fund the HSA and are reasonably certain that you will remain HSA eligible for the entire following year.

If you are >= 59 1/2 and have no other way to fund an HSA. You should take the IRA distribution without penalty and make the HSA contribution. The IRA distribution and HSA deduction will cancel each other and you will have no testing period subject to a penalty for failure.

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