IRA to HSA Funding Method

The Judo Money Move:  IRA to HSA transfer


The most attractive features of Health Savings Accounts (HSA) are still vastly under-appreciated.  As more employees enroll in High Deductible Health Plans (HDHP), the savviest of investors are finally becoming attuned to several HSA “judo moves”.  An IRA to HSA funding may be at the top of the list.

While the triple tax-advantaged nature of HSAs clearly benefits the rich the most, the IRA to HSA funding benefits everyone saving for retirement.  Here are the vitals:

– Once a Life:  An IRA to HSA funding can only happen once a lifetime for account owners – so the earlier you do it the better (if you invest the funds you can take advantage of the potential of compound interest — pretty powerful over a decade or two)
– Amount of funding:  based on the annual maximum contribution – keep in mind before funding be sure to count any contributions from your employer as that counts towards the max contribution
– 12 month Test:  you must stay enrolled in the HDHP for 12 months following the funding.  Beware as the tax man giveth and he doth taketh
– 401(k) to HSA?:  Nope – but you can roll the balance into an IRA first then fund the HSA
– FSA:  Don’t forget:  to fund an HSA you cannot be enrolled in a flexible spending arrangement unless it is a limited purpose FSA.  Limited purpose generally refers to Dental and Vision

It’s no wonder people don’t know about such details — it can get complicated.

Why Consider This?  

Is this worth doing?  Yes, and here’s my rationale:  as stated, compound interest is powerful.  In fact Einstein is said to have stated:   ‘Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.’


Hank’s new HDHP covers his family.  So he contributes $6,750 to his HSA from his IRA.  If just that one contribution grows at 5% for 20 years the future value will be $17,909.76.  If his marginal tax rate is 30% when he starts drawing on the account in retirement, over $5,300 that would have otherwise been taxed from an IRA distribution is now his to keep.  And better yet, there is no required minimum distribution with HSAs.  If Hank is healthy he can continue to let that money grow.

So in reality the combination of the compound interest in conjunction with the tax advantage that makes this option so compelling.

One last note:  America’s entitlement system (Social Security and Medicare) is not in good shape.  It is possible that not only will Social Security benefits be cut in the future, tax rates may also rise to fund entitlement spending.  Every day 10,000 folks reach 65 years old.  That means a lot more pressure will be placed on government programs.  If tax rates increase in the future, funding your HSA early on will be even more valuable.

Consumers looking to treat their HSA funds as a retirement savings vehicle can visit our homepage to enroll:

This post should not be considered tax or investment advice.

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