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

[Snake Plissken]

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]

"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.

[Snake Plissken]

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 Plissken]

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

[dmertz]

Since this distribution is from an inherited IRA (code 4 in box 7 and the IRA/SEP/SIMPLE box marked), you should NOT be claiming this as an HSA Funding Distribution.  You should instead be claiming this as a taxable distribution and a deductible HSA contribution.  This is why TurboTax does not offer the option to report a distribution from an inherited IRA as an HFD; it is not in your best interest to do so.

Go back and delete the Form 1099-R and reenter it properly, without indicating that money was put in an HSA, then complete the HSA section to indicate that you made a personal HSA contribution of an amount equal to the amount sent to the HSA.  The taxable result will be the same as the inappropriate entries that you made without incurring any of the the limitations associated with an HFD.  The taxable result will be the same as what you saw by treating it as an HFD.

[Snake Plissken]

Dmertz:

            Thank you for your response and interest.  It is appreciated.  Not sure if turbotax doesn’t allow this, since that would be contrary to the provisions of the Internal Revenue Code, wherein it is specifically authorized.  Additionally, there is no “code” in box seven of the 1099-R for an IRA to HSA transfer.  Moreover, I was able to “get it to work” even though, it admittedly seemed a bit odd (see my prior post).  Perhaps, the Intuit Gods can weigh in and provide clarification, but not going to hold my breath.

            Regardless, I am not quite sure I follow your logic.  Whether the Taxpayer chooses to utilize the “once in a lifetime transfer” from IRA to HSA or chooses to take the amount as an “above the line” deduction, they both reduce their Adjusted Gross Income by the same amount. The “once in a lifetime” Taxpayer does it by exclusion, the other Taxpayer does it by deduction.  

            Thus projecting the future, I give you a scenario based on the following assumptions:

            Assumptions:  Both Taxpayers are similarly situated, that is:

            1)         Both Taxpayers (TP) have the same amount of income and are in the 15% Capital Gains Rate and are 55 years of age and eligible for once in a lifetime transfer from IRA to HSA; further both TP have a long term capital gain in a traditional IRA of $4,500.00 and transfer $4,500 to their HSA;

            2)         Both TP earn 5% on their investment; and, invest the same amount of money in the HSA at the same time (a full year in year one); and,

            3)         Neither TP withdraws money from their HSA for five years.

           At the beginning of year one, the TP who choose to deduct the contribution is subject to Capital Gains tax at 15% and now has $3,285 to put in her HSA.  Over the five years she earns $ 1,056.78 and her HSA is now worth $4,881.78.

Alternatively the TP who choose to make a “once in a lifetime” puts the entire $4,500 in her HSA.  Over the five years she earns $1,243.27 and her HAS is now worth $5,743.27.

            Thus, by taking advantage of her “once in a lifetime” contribution to HSA via the IRA the TP who choose that vehicle has outgained the other TP by nearly 18%! (By the way, in case you’re wondering I utilized Bankrate’s savings calculator for the earnings calculations, not mine, you would not want that).

            Besides this argument I make a more “intuitive” observation; that is, Congress knew it was going to reduce revenue when they created a “once in a lifetime” transfer from IRA to HSA and that is exactly why they proscribed it being only “once in a lifetime.” Am I missing something?

Yours Truly,

Snake

[Snake Plissken]

Dmertz

                 Thank you for your response and interest.  It is appreciated. 

            Not sure if Turbotax© doesn’t allow this, since that would be contrary to the provisions of the Internal Revenue Code, wherein it is specifically authorized.  Additionally, there is no “code” in box seven of the 1099-R for an IRA to HSA transfer.  Moreover, I was able to “get it to work” even though, it admittedly seemed a bit odd (see my prior post).  Perhaps, the Intuit Gods can weigh in and provide clarification, but not going to hold my breath.

            Regardless, I am not quite sure I follow your logic.  Whether the Taxpayer chooses to utilize the “once in a lifetime transfer” from IRA to HSA or chooses to take the amount as an “above the line” deduction, they both reduce their Adjusted Gross Income by the same amount. The “once in a lifetime” Taxpayer does it by exclusion, the other Taxpayer does it by deduction.  

               To project the future of each of these taxpayers, I give you a scenario based on the following assumptions:

                 Assumptions:  Both Taxpayers are similarly situated, that is:

              1)         Both Taxpayers (TP) have the same amount of income and are in the 15% Capital Gains Rate and are 55 years of age and eligible for once in a lifetime transfer from IRA to HSA; further both TP have a long term capital gain in a traditional IRA of $4,500.00 and transfer $4,500 to their HSA;

            2)         Both TP earn 5% on their investment; and, invest the same amount of money in the HSA at the same time (a full year in year one); and,

              3)         Neither TP withdraws money from their HSA for five years.

              At the beginning of year one, the TP who choose to deduct the contribution is subject to Capital Gains tax at 15% and now has $3,285 to put in her HSA.  Over the five years she earns $ 1,056.78 and her HSA is now worth $4,881.78.

              Alternatively the TP who choose to make a “once in a lifetime” puts the entire $4,500 in her HSA.  Over the five years she earns $1,243.27 and her HAS is now worth $5,743.27.

              Thus, by taking advantage of her “once in a lifetime” contribution to HSA via the IRA the TP who choose that vehicle has outgained the other TP by nearly 18%! (By the way, in case you’re wondering I utilized Bankrate’s savings calculator for the earnings calculations, not mine, you would not want that).

      Besides this argument I make a more “intuitive” observation; that is, Congress knew it was going to reduce revenue when they created a “once in a lifetime” transfer from IRA to HSA and that is exactly why they proscribed it being only “once in a lifetime.” Am I missing something?

Yours Truly,

Snake

[dmertz]

Your comparison is flawed.  Distributions from IRA are taxable as ordinary income; the capital-gains tax rate is not involved at all.  Not treating it as an HFD results in an addition to ordinary income of $4,500 and a deduction of $4,500 for a net change of $0 in AGI, and therefore no effect on the amount of other income that might be taxable as long-term capital gains.  In both cases the contribution to the HSA is $4,500.  There is no taxable difference between the two choices.  The only differences are that treating it as an HFD uses up the once-in a lifetime HFD and makes the contribution subject to income tax and a 10% penalty if the HFD testing period is not completed, neither of which is desirable.

[Snake Plissken]

OK and fair enough, But since I was 62 when I made it, and it was made properly, I did well to take advantage of it,  This year, 2020, at age 64, I will simple deduct contributions to HSA. since little chance to make contributions next year, although will try and make some before medicare eligibility in February 2021.  I still do not understand why turbotax made this difficult, but it sure seemed to.

Glad we worked this out! Whew!

Snake

[dmertz]

An HSA Funding Distribution is generally an HSA funding method of last resort and it's only suitable for those who would otherwise pay an early-distribution penalty on the distribution from the IRA.  For those who have the funds to do so, it's generally better to fund an HSA contribution with money from non-retirement money, receive the tax deduction and lower their tax liability.

I see TurboTax making this "difficult" as being a benefit by discouraging you from reporting an HFD under circumstances where is it detrimental for you to do so.