Considering moving your health savings account (HSA) funds from one provider to another? Luckily for you, the HSA rollover process isn’t as difficult as you may think. The IRS allows you to fund a new HSA account from another HSA account, an individual retirement account (IRA), and even a 401(k) if you know a few tricks. This article will cover each process step-by-step. It will also explain the IRS rules in plain English, so you can enjoy all the tax benefits without worrying about penalties.
How to Establish an HSA Rollover
The easiest and safest way to kick off an HSA Rollover is by contacting your current HSA provider. It could be a financial institution such as a bank or a mutual fund company. If you’ve opened one through your employer, the benefits department should tell you exactly whom to get in touch with.
From there, instruct your HSA provider to establish a “trustee-to-trustee transfer” of your funds into a new account with a different HSA provider. Most allow you to do this online. Or you can call and ask for a trustee-to-trustee form. Fill it out, send it back and your HSA provider will handle the rest.
You may have heard that the IRS allows HSA rollovers once every 12 months. In truth, you can make as many trustee-to-trustee transfers as you wish. The IRS doesn’t treat each transfer as an official “rollover.”
However, an actual rollover does follow the 12-month rule. Here’s how it works. You contact your current HSA provider and request it sends you a check or direct deposit of your funds, so you can set up an HSA rollover. Then you have 60 days to deposit those funds into your new HSA account. If you fail to do so, the IRS will levy income tax on the amount you rolled over, plus a 20% penalty.
As you can see, setting up a trustee-to-trustee transfer closes the door to some costly mistakes. Not to mention it’s a much easier process than an official HSA rollover. But if you follow the rules for both, the IRS won’t treat the amount of money you move as taxable income. Moreover, it won’t reduce your HSA contribution limit for the year it took place.
However, these methods apply to ordinary HSAs. If your HSA money is technically invested in securities like mutual funds and stocks, the process works a little differently.
How to Rollover HSA Investments
HSA providers include various financial institutions, including mutual fund companies. Some essentially allow you to open HSA accounts that function like investment portfolios. So the money you put into your HSA gets invested in securities like stocks, bonds and exchange-traded funds (ETFs).
An HSA rollover involving these types of accounts is known as an “in-kind” transfer. You’d have to contact your HSA investment provider and request that your funds be transferred to a different provider. Keep in mind that some institutions don’t allow this. In this situation, you can liquidate your investments and then transfer the funds to another HSA account yourself.
However, this move may leave you open to some tax risk. Remember, the federal government created HSAs. So it exempts official HSA rollovers and transfers from federal income tax. On the other hand, states can decide whether they want to comply with federal tax rules regarding HSAs. Luckily, more than 35 states follow the federal guidelines. Some don’t and others kind-of do. For example, New Hampshire doesn’t tax income but it taxes interest, dividends and capital gains on investments.
When making an in-kind transfer or any kind of HSA rollover, it would behoove you to contact a tax professional or to find a financial advisor. This professional can safely guide you through the process while steering you clear of tax penalties.
How to Rollover an HSA from One Employer to Another
If you’ve opened your HSA account through your employer and you’re changing jobs, your HSA comes with you. But maybe your new employer works with a better HSA provider. Or you found a financial institution you want to work with.
Either way, just follow the steps detailed above. Contact the HSA provider directly and request a trustee-to-trustee transfer. Or request a check, and rollover the funds yourself. Just remember you have 60 days from when you get your money to deposit it into a new HSA or you’ll suffer a tax penalty.
IRA to HSA Rollover
To rollover IRA funds into your HSA, you can contact your IRA recordkeeper and request the transfer. Most allow you to do this online, over the phone or by mail. The process reflects the one you’d follow to move money from one HSA account to another.
However, the IRS permits you to move money from an IRA into an HSA once in a lifetime. A rare exception exists. But we’ll get to that later. For now, let’s lay down some ground rules so you won’t face any tax penalties. First, both accounts must be in your name. Second, the IRS allows this only for a traditional IRAs or Roth IRA. Other accounts like SEP IRAs and Simple IRAs don’t enjoy this perk.
In addition, this kind of transfer counts toward your HSA contribution limit for the year it’s made. So it’ll help if you do it at a time when you have as much room as possible to contribute toward the maximum.
And most importantly, you must pass the Testing Period. This stipulates that you must remain covered by a high-deductible health plan (HDHP) that’s HSA eligible for 12 months after the transfer is made. The testing period begins the month you make the transfer and extends until the final day of the 12th month after. So if you triggered the HSA rollover on April 13, 2018, the testing period runs until April 30, 2019.
Failure to comply results in some serious tax penalties. You’d owe federal income tax on the amount you transferred for the year you failed to be covered by an eligible high- deductible health plan (HDHP). Plus, the IRS will hit you with a 10% penalty. The only exception is losing coverage due to death or disability.
Why so many restrictions? Well, the ability to transfer IRA funds into an HSA essentially means you’re turning money you’ll eventually pay taxes on into money you’ll never pay taxes on—as long as you use it for qualified medical expenses.
And now for the “once in a lifetime exception.” Technically, you can make an additional IRA-to-HSA transfer during the same year if you change your eligible coverage from single to family. And you can do it up to your new limit. Plus if you’re at least age 55 by the end of the tax year, you can also factor in the additional $1,000 “catch-up” contribution. So your HSA contribution maximum could potentially jump from $4,400 to $7,750 in 2018.
401(k) to HSA Rollover
Technically, the IRS doesn’t allow you to roll over funds directly from a 401(k) into an HSA. However, you can always set up a 401(k) to IRA rollover. Afterward, you can transfer the funds from the IRA into your HSA. But remember to follow the rules.
How to File an HSA Rollover
You report HSA rollovers on IRS Form 8889. On line 14b, you should fill out the total amount you rolled over or transferred from any eligible account into an HSA account. You should also record the total amount of distributions you made during the tax year, including the HSA rollover, on line 14a.
Of course these days, the best tax software can make this process seamless.
Don’t let hesitation keep you from rolling over your HSA funds into a better account. Simply contact your original HSA provider and request a trustee-to-trustee transfer. This process bypasses the rollover once-every-12 months rule. Plus, it doesn’t reduce your HSA maximum contribution limit for the year. In addition, you can roll over funds from your IRA to an HSA utilizing the same process. This, however, will reduce your annual contribution limit. Nonetheless, it’s like turning tax-deferred money into tax-free money for eligible medical expenses. A tax haven you’re not likely to find anywhere else — legally at least.
Tips On Conducting an HSA rollover
- Not sure where to roll over your HSA funds? As long as you keep your HSA-eligible HDHP coverage, you can open one at almost any bank. But the choice can be difficult with so many options. To help you out, we published our report on the best banks in America.
- Rolling over HSA funds can be as complex as it is rewarding. You have to follow some rules in order to enjoy the many tax benefits and avoid just as many potential penalties. A professional tax and financial advisor can assist you in making sense of all this, while helping you save for your personal needs. To give you some pointers, we developed the SmartAsset financial advisor matching tool. It connects you with up to three financial advisors in your area who specialize in areas such as saving for medical care. It also displays their profiles. So you can review their credentials before deciding whether to work with one.
Photo credit: ©iStock.com/Michael-Merck ©iStock.com/cnythzl , ©iStock.com/everythingpossible