Are you considering moving your Health Saving Account (HSA) from one provider to another? Although there isn’t any standard to be followed, most providers offer rollover or transfer facilities for HSA funds transfer.
So, you have got two options. Either you can roll your funds to a new provider or make a trustee-to-trustee transfer. However, rollovers require you to report tax and subject you to tax penalties if you fail to deposit your funds within 60 days.
Fortunately, the rollover or transfer process isn’t as complicated as you might be thinking. You can fund your new Health Saving Account from the previous HSA, Individual Retirement Account (IRA), or even 401k.
To know how to perform each transfer without worrying about tax penalties, here is a detailed guide on every available option
Official HSA Rollover
IRS allows the Health Saving Account holders to roll over their funds to a new provider once a year while still maintaining tax-advantaged status.
To conduct an HSA rollover, contact your current HSA provider, such as a bank or mutual fund company, for the rollover. Health Saving Account custodians will send your funds via a check or to your personal bank account.
The important thing to take care of is that you have 60 days to deposit your funds in the new Health Saving Account.
After 60 days, it will be considered a taxable distribution, and the IRS will subject you to income taxes and a 20% penalty. Proceeding with the rollover properly saves you from taxable income tax, penalty and prevents reduction to your contribution limit for the year.
HSA Trustee-To-Trustee Transfer
It is a lot easier and quicker process than an official rollover. Actual rollover follows the 12-month rule, but it does not apply to HSA trustee-to-trustee transfer. As IRS doesn’t consider such a transfer as an official rollover, you can make as many trustee-to-trustee transfers as you want.
In transfer, you don’t receive any money in the form of a check or into your personal account. Instead, it occurs directly between the providers.
For this purpose, you have to contact your current Health Saving Account provider and instruct him to conduct a trustee-to-trustee transfer into a new account with a different provider. Most providers do all the processing online, and you don’t have to visit in person.
➡LEARN MORE: How long does a wire transfer take?
IRA to HSA Transfer
IRS allows you to make a transfer from IRA to HSA once in a lifetime. For IRA to HSA transfer, you must know that,
- It is allowed only once in a lifetime
- IRA and HSA must belong to the same person
- IRS only allows traditional and Roth IRAs as they are straightforward
- IRS doesn’t allow SEP or Simple IRAs as they are complicated
The transfer counts in your annual contribution limit for that year. So, it’s better to do it at a time when you have enough room to take full advantage of this opportunity.
401k to HSA Rollover
The IRS doesn’t allow funds to roll over directly from 401k to HSA. However, it is possible by conducting 401k to IRA rollover. Afterward, you can transfer funds from the IRA to HSA.
Some HSA providers allow Health Saving Accounts to work as investment portfolios. As a result, the money in HSA accounts is invested in liquid securities such as stocks, bonds, or exchange-traded funds (ETFs). When an HSA rollover for such accounts is performed, it is known as an In-Kind transfer.
To conduct the rollover, you have to contact the provider to transfer your funds. Some providers do not allow this transfer. As a result, you have to liquidate your investments before moving to another Health Saving Account. However, this may pose you some tax risk as certain states consider interest, dividends, etc., as taxable income.