Should You Consider an IRA to HSA Rollover in 2023?

April 13, 2023
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Health Savings Accounts (HSAs) can be highly effective when you have a high-deductible health plan and significant medical expenses. In addition to helping cover medical costs, they can also function as an excellent retirement account because they have three unique tax benefits:

  1. You can deduct contributions from your taxable income.
  2. Your account balance grows without being taxed.
  3. Withdrawals for qualified medical expenses are tax-free.

In the first two benefits above, an HSA is very similar to a standard individual retirement account (IRA) like a Roth IRA or 401(k) plan. You make contributions to your account and those monies don’t count as part of your taxable income. Then, the account grows through investing just like an IRA.

Using HSA Funds for Medical Expenses

Where an HSA differs from an IRA is the withdrawals. You are able to withdraw funds from your health savings account tax-free and penalty-free—regardless of your age—as long as the money is used for qualified medical expenses. After the age of 65, you can withdraw funds from an HSA and use for any purpose. You aren’t limited to only medical expenses once you reach this age, and you would pay taxes at ordinary income rates the same as you would when withdrawing funds from a traditional IRA.

HSA Contribution Limits

HSAs do have annual contribution limits. It is recommended that you fully fund your account each year until you enroll in Medicare and ideally minimize distributions after that. Even if you don’t start contributing to an HSA until you are 50, you could accumulate as much as $200,000 or more by the time you reach age 65 (based on current contribution limits).

IRA to HSA Rollover

You can also rollover funds from certain IRA accounts with a one-time qualified HSA funding distribution. You will want to be strategic about when you do this and how much you rollover. The IRA to HSA rollover amount is limited to your HSA contribution limit for the current year. In 2023, this can be as much as $3,850 for individual coverage and $7,750 for family coverage. HSA plan holders over the age of 55 can increase this one-time rollover contribution limit by as much as $1,000.

The rollover amount doesn’t count as income. However, it isn’t tax-deductible and reduces the additional amount you can contribute to your HSA this year. The primary benefit is turning this otherwise taxable money into tax-free money when it is used for medical expenses.

To learn more about HSAs and to complete an IRA to HSA rollover, please contact Illumination Wealth and talk with one of our leading financial advisors.