Using an IRA to fund an HSA

A qualified HSA funding distribution gives clients a one-time chance for a tax-free distribution of funds from an individual retirement account

Oct 9, 2018 @ 1:00 pm

By Ed Slott

Funds from individual retirement accounts generally cannot be rolled over to a health savings account, but there is a one-time exception for a qualified HSA funding distribution, or QHFD.

An individual is allowed to transfer funds from an IRA to an HSA account up to the remaining contribution amount allowed for the year, but there are some restrictions.


A QHFD is a tax-free distribution of IRA funds to an HSA. The client gets to shift taxable funds to an HSA, which can then make tax-free distributions to the client for qualified medical expenses. Because the distribution is tax-free, it is not subject to the IRA 10% early distribution penalty.

A QHFD distribution is not subject to the pro-rata rule. This means that a client who has pre- and after-tax funds in his or her IRA and uses a QHFD gets to move taxable funds out of the IRA account, leaving a larger portion of after-tax funds in the account. This could make a later Roth conversion of the IRA more attractive, or it could mean that larger amounts of future distributions will be tax-free.

A QHFD can also be made from inherited IRAs. The QHFD will be subject to all the restrictions noted above.

A QHFD counts toward an individual's required minimum distribution for the year. This won't help IRA owners because they cannot contribute to an HSA once they are covered by Medicare, but it could be helpful for beneficiaries who will have RMDs from their inherited accounts. (More: Last chance to undo a Roth conversion)


The IRA funds can be moved to the HSA account only as a direct transfer. They cannot be moved as a 60-day rollover. An individual may do only one QHFD in his or her lifetime. A client with multiple IRAs still can do only one QHFD. IRA accounts can be combined before the QHFD in order to be able to transfer the maximum amount.

Example: Monty has two small IRA accounts with balances of $4,000 and $6,000. He wants to do a QHFD in 2018 for his HSA contribution limit of $6,900, but neither one of his IRAs holds that amount. Because Monty can do only one QHFD, he will have to combine his IRAs into one account and then do his QHFD from the single IRA, which would have a balance of $10,000.

An exception to the one-time-only rule exists for individuals who have self-only coverage on the first day of the month in which the QHFD occurs but who switch to family coverage later in the year. They can do an additional QHFD to cover any remaining difference between the self-only contribution limit and the family contribution limit.

The transfer can come from an HSA owner's traditional IRA, Roth IRA, or inactive SEP or Simple IRA.

The transfer can only go between IRAs and HSAs owned by the same individual, and the funds transferred must be pre-tax funds only. The distribution is an exception to the pro-rata rule for IRA distributions. The use of Roth IRA funds for a QHFD will be extremely limited, as a Roth IRA will generally be mostly after-tax funds.

The amount that can be transferred as a QHFD is determined by the contribution limit for the HSA owner. He can transfer up to the total amount of his contribution limit for the year, minus any contributions already made. The owner cannot take a tax deduction for the QHFD.

The QHFD becomes a taxable distribution if the individual no longer qualifies for an HSA during a period beginning on the first day of the month when the QHFD was made and ending on the last day of the 12th month following that month.

Example: Greg did a QHFD in November 2018. He must remain eligible for an HSA beginning on Nov. 1, 2018, and ending on Nov. 30, 2019. There is an exception if his failure to remain eligible is due to his death or disability.

(More: Can inherited IRAs be split in a divorce?)

Ed Slott, a certified public accountant, created the IRA Leadership Program and Ed Slott's Elite IRA Advisor Group. He can be reached at irahelp.com.


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