Traditional IRA to HSA Conversion: “Qualified HSA Funding Distribution”
A provision in the Tax Relief and Health Care Act of 2006 allows a one-time IRA Rollover to an HSA, better known as a qualified HSA funding distribution (QHSAFD), and allows individuals a one-time IRA Rollover to an HSA account that can be used to fund your HSA.
Important considerations
You need to be covered by a high-deductible health plan and have an IRA in place
You will need to remain HSA eligible for the 12-month testing period after the QHSAFD is made.
This is a direct trustee-to-trustee transfer, meaning the IRA custodian transfers the funds directly from your IRA to your HSA account. It must be through a direct transfer and not through a withdrawal and a deposit
You can only make one QHSAFD in your lifetime.
The maximum amount you can transfer is the annual HSA contribution limit for individuals, plus the catch-up for individuals 55 and older for the current year contribution limits.
The QHFD will satisfy your HSA contribution limit for the year
Once you make the QHSAFD, it becomes irrevocable, and it cannot be reversed.
SEP and Simple IRAs are not eligible for a QHFD
The distribution from your IRA from a QHSAFD is not included in your taxable income, and the rollover to your HSA is not a deduction from your taxable income for the year.
Roth IRAs can be used for QHSAFDs, but Roth IRAs are less beneficial than Traditional IRAs due to Roth IRAs' already tax-free advantage in retirement.
QHSAFD is a valuable tool for individuals to reduce future medical expenses while also leveraging their IRA funds for healthcare expenses without incurring additional taxes, thereby reducing their IRA balance and lowering their Required Minimum Distributions (RMDs) in retirement, while benefiting from the tax advantages of an HSA for the future