In January of 2014 I started an H.S.A with Bruce Fund (BRUFX). BRUFX online site lacks all the bells and whistles most of us come to expect in todays electronic age, but since this is a very static investment I am o.k with occassionally mailing in my yearly contribution (or requesting a distribution). Also, there is no separate cash position with my account...I am always fully invested in the fund.
For those of you who are considering an H.S.A be aware that a one time IRA direct rollover can help fund your H.S.A for that year. As a single account holder (over 55) I was able to do a direct rollover of $4350 from a tax-deferred account to a tax-free account (my H.S.A) for 2014.
For 2015 (age 56) I will be taking IRA distributions (72-t) until I am 59.5 and then take normal distributions there after until I am 65 using these distributions to fund my H.S.A. My understanding (tax wise) is that this will provide me with a "tax wash" on the portion of my IRA distribution I use to contribute to my H.S.A since H.S.A contributions are tax deductible against earned income.
Comments from others would be appreciated.
Comments
For HSA deductions, income means any income - unlike an IRA, that is restricted to compensation.
(IRA compensation is more than "earned income" - it includes alimony and nontaxable combat pay.)
So just because you're not working doesn't mean that you can't benefit from an HSA deduction. In fact, that HSA deduction can be applied to a Roth conversion.
So if one's got the cash available (e.g. because of an RMD, or just because one has taxable assets), contribute that cash to the HSA and use the deduction to "pay for" an IRA conversion of the same amount.
For example, if one is in the 25% bracket, and is eligible for a $1K HSA contribution, then one can add $1K to the HSA, get a $1K deduction, and use that deduction to convert $4K from a traditional IRA to a Roth "tax free".
In your case, it sounds like you don't have the cash available (you're taking distributions from the IRA to fund expenses). In that situation, the IRA->HSA conversion makes sense. It's effectively a Roth conversion (an HSA is much like a Roth), but without paying taxes on the conversion.
That was my thought as well, but now you have me thinking.
Presently I recieve only a pension income (which is not considered earned income), but which I pay taxes on. Since this pension income is not earned income, I am not able to contribute to a Roth or any other IRA.
If I understand you correctly, I could fund my H.S.A. with any income source (such as part of my pension income) and then use that deduction to offset the taxes on a IRA to Roth conversion.
I hadn't thought of contributing part of my pension income to my HSA, but what you lay out makes sense. This would effectively require two pots of money, but assists in moving IRA dollars to a Roth status through a taxable conversion. I like this scenario a little more in that it makes these dollars more flexible than a single pot of money (my IRA) funding a H.S.A.
H.S.A., as I understand it, are more restrictive than the Roth with regard to how the account is distributed.
Thanks for chiming in.
So long as you keep track of medical expenses (and don't use them for other tax purposes, e.g. as itemized deductions), you can count them as medical expenses for tax free distributions from the HSA, even if those distributions are taken years from now. The only timing requirement is that the HSA was opened before the expenses were incurred. So while there are more restrictions on the HSA than the Roth, it can be a virtual Roth.
Hard to find any pages on minimum income requirements. So far, I've found:
http://healthequity.com/ed/resources/docs/HSA_guidebook.pdf:
"You can contribute money from both earned and unearned income up to the IRS yearly limit, as long as you are covered by an HSA-qualified HDHP and are not enrolled in Medicare. Family members and other individuals can contribute to your account, however, only you and your employer may take tax deductions. Others who contribute to your account are unable to take a tax deduction. However, it is not required that their contributions toward your HSA count toward your gross income. In other words, all contributions to your HSA, no matter what the source, are tax-free to you."