HFD from Roth IRA to HSA (under 59 1/2)

[eartheyes5]

I did a one-time HSA funding distribution from my Roth IRA to an HSA in 2023. I'm under 59 1/2, and the Roth distribution was from earnings (not contributions). To avoid the early withdrawal penalty, I want to indicate for the associated 1099-R that the distribution was used for an HFD. However, TurboTax is not giving me the option to indicate this. Does anyone know how I can indicate this Roth IRA distribution was to fund an HSA?

[BillM223]

TurboTax does not support trustee-to-trustee transfers from a Roth IRA to a Health Savings Account.

I am looking for exceptions to the 10% penalty that might apply. What is the code in box 7 on the 1099-R?

[dmertz · Accepted solution]

You can trick TurboTax into creating the correct reporting on your tax return by entering the HFD as a traditional IRA distribution with code 1 instead of as a Roth IRA distribution with code J.  Whether from a traditional IRA or a Roth IRA, HFDs are not included on Form 8606, so the only reporting of the HFD on your tax return is that it will be included on Form 1040 line 4a and excluded from line 4b with the "HFD" notation.  Line 10 of Form 8889 will also be correct.  With no tax withholding, the IRS will be unaware that you used of code 1 instead of code J to accommodate TurboTax.  (If this Form 1099-R includes other distributions from the Roth IRA, you'll need to split the Form into two for entry into TurboTax so that the other distributions are correctly reflected on Form 8606 Part III.)

[eartheyes5]

Thank you for the response! The box code is J. I think the next response on this thread may be the solution.

[eartheyes5]

Thank you - this workaround is brilliant. I'm going to give it a go, and will update this thread after in case anyone else is having this issue. Thank you so much for the response.

[Opus 17]

By the way, this is something that anyone else reading this should probably not do without extensive consideration and professional advice.  If you do a funding distribution from a traditional pre-tax IRA into an HSA, you are turning money that would be taxable when withdrawn, into money that is not taxable if withdrawn for medical expenses.  After you turn 65, you can withdraw funds from the HSA not for medical expenses, and you pay regular income tax but no penalties.  So you are moving money that would definitely be taxed (the pre-tax IRA) into an account that could be taxed (but won't be if you use it for medical expenses.)

When you do this with a Roth IRA, you move money that won't be taxed on withdrawal (as long as you are over age 59-1/2) into an account that could be taxed (if you withdraw it for non-medical reasons).   And remember, that with a Roth IRA, you can withdraw contributions tax-free at any time for any reason, including medical expenses.  You only pay tax if you withdraw earnings or recent conversions.

The only time it would be reasonable to do an HFD from a Roth IRA is if you

a. have large urgent medical bills

b. are under age 59-1/2

d. have already withdrawn all the contributions from your Roth IRA (non-taxable)

d. have no other funds that you could deposit into the HSA to get a tax deduction and then withdraw to pay the bills.

In that case, doing an HFD using the earnings of the Roth IRA into the HSA, and then withdrawing from the HSA to pay the medical expenses, will avoid the income tax and penalty on the Roth IRA earnings withdrawal.  But most of the time, doing an HFD from a Roth IRA does not make financial sense.

[eartheyes5]

For anyone else in this (very unique!) situation - the workaround proposed by dmertz above worked perfectly. I double checked all the forms submitted to the IRS and everything was correct. Thank you again.