HSA Deposit Transfers From IRA
Q: I purchased a health insuance policy last year that is HSA compatible, but I never opened a Health Savings Account because I did not have the extra money. I have just been paying for medical expenses out of my pocket. I do have an IRA account, and I heard that I can use the money in that account to pay for health care expenses in 2007. Is this true?
A: The Tax Relief and Health Care Act of 2006 included provisions that would take affect on January 1, 2007, and one of these provisions did include transferring funds into an HSA account from an IRA. The maximum contribution amount was also increased to $2,850 for a single person and $5,650 for family coverage. You may now make a one time transfer from your IRA into a Health Savings Account, but you will need to open an HSA in order to do this. Deductions may not be taken directly from your IRA in order to pay for medical expenses; they need to come from the HSA account. One additional change, that is probably the most important, is that now partial year enrollees are able to contribute the full annual maximum into their Health Savings Account. This will encourage people to enroll in high-deductible health plans during the middle or end of the year in order to obtain the tax benefits. The initial purpose of Health Savings Account legislation by the federal government was to encourage persons to purchase health insurance, and providing them with more flexible guidelines will hopefully make these HSA compatible health plans more attractive.
Can I deduct my medical expenses for last year from the amount that I transfer into a new HSA account from my IRA? I had around $400 in medical expenses, so can I only transfer $2,450 from my IRA and get the full tax benefit?
Comment by Rob — January 11, 2007 @ 9:04 am
You will want to confirm this with your tax accountant. We are limited to offering advice regarding health insurance and are by no means experts on the tax benefits of a Health Savings Account. However, we can assume that you have already received all the tax benefits your are entitled to when you made the deposit into your IRA. The purpose of now allowing you to make a one-time transfer into an HSA from your IRA is to give you access to those funds to help pay for medical expenses. You will have no plenty for withdrawing funds from your IRA if they go directly into the HSA. And, when there will be no penalty from making withdrawals from your HSA this year in order to pay for qualified medical expenses.
Comment by admin — January 11, 2007 @ 9:09 am