Got a big fat IRA balance staring you in the face, taunting you as you await your 60th birthday? Ever wish there was a way to tap your IRA funds TODAY for good use, WITHOUT PENALTY?
Well, good news. There IS a loophole where you can raid your IRA and transfer the money directly to your Health Savings Account (HSA). As with anything having to do with removing money from an IRA, there is a paperwork minefield you must navigate. You have to meet some conditions:
- You CANNOT do this with your 401k/TSP.
- You can only do it once.
- You can only do it within the HSA contribution limit for the year ($6,450 per family for 2013).
- You have to be meticulous with the paperwork- If, for some reason, you are issued a check from your IRA, you’re on the hook for taxes and penalties.
- You MUST remain a participant in the same HDHP/HSA health plan for 12 months following the transfer or else pay a penalty. In IRS-ese: If you elect the transfer and do not remain eligible to contribute to your HSA until the last day of the twelfth month following the month of the transfer (“the Testing Period”), the transferred amount will be included in income and subject to an additional 10% tax.
Here are some reasons in favor of doing the IRA-to-HSA-Transfer:
- You’ve had a recent run-up in IRA account value and you’d like to ‘skim some of the cream’ off of the top of your IRA balance today, without penalty.
- You have or are anticipating a major medical expense, and your current cash flow situation stinks.
- You’re nearing retirement and believe you already have enough money in tax-deferred IRA-type plans.
- You’ve been furloughed at work and are stopping salary deferrals to your HSA- You’re looking around for another HSA funding source.
Here are some arguments against performing the IRA-to-HSA Transfer:
- You’ve already put tax-free money in to the IRA account.
- By transferring IRA money directly to the HSA, you’re denying yourself the primary benefit of having an HSA (if you put what would otherwise be TAXABLE money in to an HSA , you not only bypass Federal and State income taxes like the 401k, but you also bypass FICA/Payroll taxes).
- Unlike an IRA, where the investment ‘world is your oyster’, you have limited investment vehicles available inside an HSA.
- Your cash flow stinks? Why are you doing an HSA in the first place?
Once you’ve weighed the benefits against the costs, here’s how you can do the IRA-to-HSA Transfer:
- Figure out what’s left of your annual HSA contribution eligibility (Hint: Feds have to take in to account the fact that Uncle Sugar has been contributing $125/month in to your Aetna HSA).
- Obtain the bank routing number and account number for your HSA (Another hint for Feds on Aetna HSA- For security reasons the number on the front of you debit card is NOT your HSA account number, and furthermore your account number is not listed on your monthly paper statements. You’ll have to call Aetna to obtain your HSA account number).
- Go to your brokerage account and fill out the necessary custodial transfer form (make sure you ask for a ‘Trustee-to-Trustee Transfer’).
- Watch and wait for the check to clear.
Yet one more caveat:
If you have not completed a full calendar year of HSA participation (due to starting a new job or experiencing a ‘life changing event’), you can’t contribute to the entire family limit of $6450 for the year (2013). You can only contribute a pro-rated amount of roughly 1/12 of the annual limit for each month that you are a participant in the HSA. AICPA has an automatic HSA calculator tool, but it is not yet updated with the 2013 limits.
Takeaway: Yes, there is a way to tap your IRA today without penalties if you are willing to jump through your O-Ring to make it happen. Carefully weigh the benefits and watch out for landmines!
For further reading:
IRS Notice 2008-51: http://www.irs.gov/irb/2008-25_IRB/ar09.html#d0e783
IRS Publication 969: http://www.irs.gov/pub/irs-pdf/p969.pdf
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