Inherited HSA, SEP-IRA, Traditional IRA once in a lifetime contributions to HSA

Forum|Forum|6 years ago
April 1, 2020
9 replies
76 views

In 2019, I moved maximum amount (over 55) from what appears to be an Inherited Traditional IRA (although thought they were taking from SEP-IRA) to a HSA. The brokerage house (correctly it seems to me) withheld taxes on roughly half of the gross distribution, which is logical because the Code permits a once in a lifetime funding of an HSA from an IRA that is not subject to taxation. (See, IRS Publication 969)

The transfer went from trustee to trustee and did not touch my sullied hands.

My problem is that turbo-tax seems to have a hiccup when I phrase it as a transfer from my Inherited IRA versus my SEP-IRA, to the HSA. Two different issues seem to be happening: 1) If I phrase it as from my SEP/IRA to my HSA my AGI decreases more favorable compared to Inherited IRA to HSA; and, 2) amounts seem like they need to be "manually entered" on 1099R and 8889-T and possibly elsewhere within turbo-tax.

Am I missing something? Seems like the program is skewed against Inherited IRA once in a lifetime contributions to HSA versus SEP Traditional IRA contributions to HSA and this ain't in the book. Please share your thoughts. Your's truly, Snake.

BillM223

Level 15

"The brokerage house (correctly it seems to me) withheld taxes on roughly half of the gross distribution, which is logical because the Code permits a once in a lifetime funding of an HSA from an IRA that is not subject to taxation."

Why do you say this? A proper Qualified Funding Distribution (QFD) (IRA to HSA) is not taxable at all. Was the distribution larger than the IRA to HSA transfer?

It is OK to do a QFD from an SEP-IRA so long as the SEP-IRA is not ongoing.

The IRS says,

"A qualified HSA funding distribution may be made from your traditional IRA or Roth IRA to your HSA. This distribution can’t be made from an ongoing SEP IRA or SIMPLE IRA. For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within the tax year in which the distribution would be made." See page 7 in Pub 969.

So if your SEP-IRA were not ongoing, I would expect a good result, which you seem to have gotten.

An inherited IRA is a different matter, as you know.

"amounts seem like they need to be "manually entered" on 1099R and 8889-T and possibly elsewhere within turbo-tax. "

What amounts are you talking about?

While you are getting back to me with this questions, you might consider this: breaking the 1099-R up into two 1099-Rs, one that is solely for the QFD, and the other for whatever amount in the distribution did not go to the HSA.

See if that works more satisfactorily.

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Snake PlisskenAuthor

Level 2

Bill -

Thank you so much for your reply, it is appreciated. Let me answer some of your questions/assumptions and perhaps you might be able to enlighten me.

Yes the distribution from the Inherited IRA was more than the HSA Qualified Funding Distribution (QFD). So, the brokerage reported a gross distribution of $9,100, moved $4,500 to HSA and withheld tax on the remainder of $4,600.

However, at least in easy step, Turbotax keeps showing the entire $9,100 as 1099-R income. (I can get a different result in "forms" approach but that is when I treat IRA as my own, and stupidly I never made this conversion within 5 years)

Yes. The SEP/IRA was not ongoing as I (as self-employed) have not made contributions to it in many years.

Thus, as it stands now, I can get a partially correct result if I "imagine" that $2,500 came from the SEP/IRA (the amount of the distribution), and the other $2,000 originated from the Inherited IRA. However, would prefer not to do this, especially since it still shows the entire $9,100 as income.

Long story short, I cannot seem to get turbotax to recognize that almost half of the gross distribution from the Inherited/IRA went to the HSA.

Any guidance or suggestions you might have would be greatly appreciated. I need to get this right because I am bumping up to another threshold - repayment of APTC.

Finally, I am 64, and thus $4,500 HSA contribution (QFD) was correct and really want to grow my HSA as much as possible prior to next year.

I have tried to explain this as simply as possible. If you need more information feel free to ask. Looking forward to hearing from you.

Yours Truly,

SNAKE

Snake PlisskenAuthor

Level 2

I think I may have figured out how to make this work in "easy step" Although it does not seem entirely correct, here is what I did in answering prompts:

1. Did you inherit? Answer: NO.

2. Tell us when person born? SUPPLIED ANSWER (dunno why this comes up, but it did)

3. Was withdrawal an RMD? YES, PART AND SCHEDULED RMD AMOUNT.

4. What did you do with the money? SOMETHING ELSE WITH IT.

5. Did you put money in an HSA? YES AND PUT IN AMOUNT IN MY CASE $4,500.

6. Was this a qualified disaster: NO.

This way the money that I moved from IRA to HSA (once in a lifetime transfer) subtracted on line 4b of 1040 and Form 8889 looks correct.

So, even though it seems odd, I believe it is correct and I am pleased.

Thanks,

Snake