Q Dear Rick:
I have a tax question that I hope you can help me with. I will be 70 later this year and next year I will begin to take my required minimum distribution. My IRA is about $75,000 and I won’t need the money. After reading a number of your articles and attending some of your talks, I thought I would do a Roth conversion starting half this year and half next year. I was discussing this with a friend of mine and he told me that the way you can avoid all the taxes on your IRA is to transfer your IRA into your health savings account (HSA). I then would be able to use the money in my health savings account to cover any medical bills. My question to you is what do you think would be better; to move the money into a Roth IRA or to a health savings account?
Joanie
A Dear Joanie:
Unfortunately, your friend was less than accurate when it came to the laws with regard to rollovers from a traditional IRA into a HSA.
Yes, the law allows rollovers from a traditional IRA into a health savings account; however, there are rules. First, the IRS only allows an IRA to an HSA rollover once in a lifetime. The rollover must be from an IRA in your name to a HSA in your name. You cannot rollover an IRA in your spouse’s name into your HSA. Once the transfer has been completed, you must remain enrolled in a high deductible health plan for at least one year. If you terminate your coverage, the rollover can be taxed to you. Furthermore, the amount of the rollover is limited. The maximum rollover allowed is the maximum HSA contribution for the year minus any HSA contributions that have already been made for that year. For example, this year the HSA contribution limit for an individual is $3,350. In addition, if you’re 55 or older, you can increase your contribution by $1,000. Thus, the maximum rollover that you can do is $4,350.
I have no problem taking money from a traditional IRA and moving it into a health savings account. For example, if you qualify and you know you’re going to need the additional money for medical costs, it is a good opportunity. The reason I like using a traditional IRA versus a Roth IRA is that we are taking tax-deferred money and converting it into tax- free money without cost. Roth IRAs are already growing tax free; therefore, there’s no benefit to convert that into an HSA.
What I would consider is a combination of both a Roth IRA conversion and a HSA conversion. I would have no problem converting the maximum from your traditional IRA into a HSA and at the same time do a Roth conversion. One of the beauties of the Roth conversion is that you can have this money grow tax free and at the same time, it is not subject to required minimum distributions.
In order to accomplish the transaction of converting your traditional IRA into an HSA, you must use a direct transfer. The key is to have the money go directly from your IRA custodian into your HSA. My advice is that you should contact both your IRA and HSA custodian so you can dot the I’s and cross the T’s.
As I mentioned many times in the past, it can be very dangerous to take tax advice from friends who are not current on our tax laws. If the reader went through with the transaction and converted their entire IRA into a health savings account, there would be substantial taxes owed on the transaction. Therefore, as opposed to saving him money it would have cost him money. Our tax laws are very complex and are getting more complex. That is why when it comes to tax advice my recommendation for most people is toseek the services of a professional. After all, if you go back over the last 10 years, we’ve had more than one tax law change a day and, thus, it is very difficult for an amateur to stay current on tax laws. Therefore, if you want to make sure that you don’t make mistakes when it comes to taxes, always make sure that you deal with a professional.
Good luck!