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Using Your IRA to Fund Your Health Savings Plan

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Retirement Planning

September 14, 2016

Funding Your HSA With Your IRA

Take advantage of this little known benefit

Health Savings Accounts (HSA) are a commonly offered benefit at many companies. The primary benefit of an HSA is it allows individuals covered by high-deductible health plans to save money for medical expenses tax-free.

But did you know that you can use your IRA to fund your HSA? If you have an HSA and have never considered using your IRA to fund it, you’re not alone. But the option is available and taking advantage of it is called a Qualified HSA Funding Distribution (QHFD).

How does a Qualified HSA Funding Distribution (QHFD) work?

A QHFD is completed by transferring money directly from your IRA to your HSA. The amount transferred cannot exceed the amount you’re eligible to contribute into your HSA for the calendar year. Such a transaction is not subject to the typical 10 percent early distribution penalty nor is it taxable. Think it's too good to be true? Read on...

What are the advantages and disadvantages of a QHFD?

If funds are needed in your HSA immediately to pay medical expenses, the QHFD is a quick and easy way to satisfy this need. It is also a way to move taxable funds out of your IRA tax free, since using funds from your HSA instead means they will be tax and penalty free. To simply take a distribution from your IRA would be taxable, plus a potential deduction, so using IRA funds in a QHFD offers a tax advantage.

The one drawback is that you may only do one QHFD in your lifetime. There is one exception to this. If you start the year out with self-only coverage and then switch to family coverage, the additional amount can be transferred in the same year. If you do a QHFD, you must remain eligible for the HSA for the period beginning with the month of the contribution through the last day of the month twelve months later.

Since the QHFD isn’t a widely understood or well-known strategy, it may not be for everyone. To discuss questions about the QHFD strategy, or if you have general questions regarding your financial future, schedule a 15-minute call with one of our advisors.

Bayntree Wealth Advisors, located in Phoenix and Scottsdale, Arizona, provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.

Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.

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