Reporting prior year IRA to HSA contribution on line 2 of Form 8889

[jdxray]

I contributed the maximum 8750 family amount (over 55) from Traditional IRA to new HSA thru Fidelity (trustee to trustee transfer) in January 2024 for 2023 tax year. We had a conforming HDHC plan starting November 1, 2023. There are no tax documents for this for 2023 (5498-SA comes out in May). IRS instructions indicate "Include on line 2 only those amounts you, or others on your behalf, contributed to your HSA for 2023. Also, include amounts contributed for 2023 made in 2024 by the unextended deadline for filing your 2023 federal income tax return, April 15, 2024." But there is no mention of how if IRA origin is treated or if treated differently. I am presuming since there is no pop up and since we use the standard deduction (no schedule A where a mistaken deduction would be) I can just leave it there and report the withdrawal for 2024 tax year. Any help appreciated. Thanks. 

[dmertz]

"I contributed the maximum 8750 family amount (over 55) from Traditional IRA to new HSA thru Fidelity (trustee to trustee transfer) in January 2024 for 2023 tax year."

This is not permitted to be a qualified HSA funding distribution.  HFDs are only permitted to be made as HSA contributions for the current tax year, 2024 in this case.  For this to be an HSA contribution for 2023 you would have to report the HSA contribution as an ordinary personal contribution which also means that you would have to make sure that the HSA custodian reports this as a contribution for 2023.  The traditional IRA distribution must then be reported as an ordinary traditional IRA distribution on your 2024 tax return, incurring an early-distribution penalty if you are under age 59½.

The probably better option would be to report this as an HFD on your 2024 tax return, provided that you will remain HSA eligible throughout 2024 and 2025, making sure that the HSA custodian records this as an HSA contribution for 2024 [not 2023 as I originally typed], then separately make an ordinary personal HSA contribution for 2023 using non-IRA funds.

[jdxray]

"The probably better option would be to report this as an HFD on your 2024 tax return, provided that you will remain HSA eligible throughout 2024 and 2025, making sure that the HSA custodian records this as an HSA contribution for 2023, then separately make an ordinary personal HSA contribution for 2023 using non-IRA funds."

Thank you for the reply. I am 62. Did you mean "2024" where I have bold italicized? I would then try to change the HSA contribution to 2024 to match the IRA distribution. I believe one can undo the whole thing before April 15, paying tax on the "other income" generated in the interim and funding the HSA from other cash for 2023, as you suggest.

I didn't in the IRS instructions there is no specific indication of prohibition to applying the one time IRA distribution as a prior year contribution. 

"Qualified HSA funding distribution.

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...

The maximum qualified HSA funding distribution depends on the HDHP coverage (self-only or family) you have on the first day of the month in which the contribution is made and your age as of the end of the tax year. The distribution must be made directly by the trustee of the IRA to the trustee of the HSA. The distribution isn’t included in your income, isn’t deductible, and reduces the amount that can be contributed to your HSA. The qualified HSA funding distribution is shown on Form 8889 for the year in which the distribution is made.

You can generally make only one qualified HSA funding distribution during your lifetime. However, if you make a distribution during a month when you have self-only HDHP coverage, you can make another qualified HSA funding distribution in a later month in that tax year if you change to family HDHP coverage. The total qualified HSA funding distribution can’t be more than the contribution limit for family HDHP coverage plus any additional contribution to which you are entitled."

The confusion for me are the words they use: "for the year in which" not "in the year year for which",  this is why I thought it was possible and was not told I was wrong by the IRA holder who facilitated the transfer after direct conversation. 

 Thanks again.

[dmertz · Accepted solution]

Yes, I meant 2024.  I've corrected that.

Being age 62, there is no good reason to make an HFD because the only reason to make an HFD is to avoid an early distribution penalty on the distribution from the traditional IRA, a penalty that you won't have anyway.  You should report the HSA contribution as a regular deductible personal contribution for either 2023 or 2024 (taking into consideration whether you will be eligible for an HSA contribution for 2024) and make sure that the HSA custodian has recorded it accordingly.  The income from the traditional IRA distribution will be on your 2024 tax return.  This derives from IRS Notice 2008-51 which says, "The amount contributed to the HSA through a qualified HSA funding distribution is not allowed as a deduction and counts against the individual’s maximum annual HSA contribution for the taxable year of the distribution."  This in turn derives form the wording in section 408(d)(9)(C) of the tax code which only makes sense if the contribution is for the same year as the year in which the distribution from the traditional IRA occurs.

As you mentioned, IRS Pub 969 says, "The qualified HSA funding distribution is shown on Form 8889 for the year in which the distribution is made."  This means that it can't be for the prior year.  The distribution from the traditional IRA was made in 2024, so for it to be an HFD it would have to be reported on a 2024 Form 8889, making it an HSA contribution for 2024.  But again, there is no reason for you to claim that the contribution is an HFD.

[jdxray]

The only reason is as a backdoor Roth equivalent which was the point for me, as I will likely not need the money until my health deteriorates, hopefully not for at least another ten years. Either way there is no real downside so long as we use a HDHP. Got some calls to make next week. Thanks again. 

[dmertz]

Just to be clear, I'm not suggesting that you not make an HSA contribution and funding it with a traditional IRA distribution (although a retirement account should be your funding source of last resort), I'm just saying that at age 62 there is no reason to claim it as an HFD.