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dgoldbe1
New Member

Inherited IRA Distribution + HSA Contribution = No Taxes?

I inherited a traditional IRA from my grandmother with a few thousand dollars last November.  My plan is to make a withdrawal from the Inherited IRA and immediately deposit the proceeds in my HSA.  I figure this way I can avoid paying taxes on the distribution, but have it available for HSA-eligible expenses if needed.  Does this makes sense?

5 Replies
dmertz
Level 15

Inherited IRA Distribution + HSA Contribution = No Taxes?

As long as you are eligible to make an HSA contribution, if you would not make an HSA contribution unless you fund it with a distribution from the inherited traditional IRA, it seems like a wise plan to use the inherited IRA to subsidize your funding of an HSA distribution.  The deduction for the HSA distribution would offset the taxable income resulting from the IRA distribution and investment growth in the HSA would be tax free (if used for qualified medical expenses) instead of tax deferred if allowed to grow in the IRA instead.

 

Given the relatively small amount, even if you didn't use it to subsidize an HSA contribution it would still probably make sense to take it out of the inherited IRA and use the money to invest in capital investments on which growth would be taxable at long-term capital gains rates instead of at ordinary income rates.  Not quite as beneficial as putting the money in an HSA but still probably beneficial over just leaving it in the inherited IRA and taking life-expectancy RMDs based on your age.

Snake Plissken
Level 2

Inherited IRA Distribution + HSA Contribution = No Taxes?

Yes there are no taxes.  See, IRS Publication 69.  Strongly advise trustee to trustee handoff if you wish to take advantage of once in a lifetime allowance for funding HSA via IRA.  If IRA less than yearly allowable amount of HSA contributions ($3,500) , plus catch-up amounts, suggest you keep powder dry, until you can take the full nut.  Hope this helps.

dmertz
Level 15

Inherited IRA Distribution + HSA Contribution = No Taxes?

The question was in regard to funding an HSA contribution with a distribution from an inherited IRA.

 

The purpose of an HSA Funding Distribution is to allow IRA funds to be used to fund the HSA contribution without incurring any early-distribution penalty on the distribution from the IRA.  Because there is never any early-distribution penalty for receiving a distribution from an inherited IRA, it makes absolutely no sense to incur the restrictions of an HSA Funding Distribution and create the potential for tax and penalty for failure to complete the testing period for the HFD in order to avoid a nonexistent early-distribution penalty.  One is FAR better off receiving a taxable distribution from the inherited IRA and using the money to fund a separate deductible HSA contribution.  One offsets the other in calculating AGI.

Snake Plissken
Level 2

Inherited IRA Distribution + HSA Contribution = No Taxes?

I was hoping and expecting you to chime in as I have seen your other posts,  I am not disagree with your assertions except that the IRS in black and white says,

 

"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 make only one qualified HSA funding distribution
during your lifetime."  Pub. 969, pg 6 2017 Version.

 

Thus, it should be possible to make a taxable distribution non-taxable by putting it into a HSA.  Your comment that it is better to reduce  the TP AGI by making a after tax distribution separately is well-taken, but beyond my mathematical skill-set. 

 

I do hope that you will comment on my other post relating to IRA to HSA and comment and also perhaps document your position (IRA straight to HSA versus IRA to taxable distribution, then to deductible HSA) with a simple example. 

 

I look forward to it and thank you.  Your's Truly, Snake.

dmertz
Level 15

Inherited IRA Distribution + HSA Contribution = No Taxes?

Yes, an HSA Funding Distribution is not taxable, but you also do not get a deduction for the HSA contribution.  A taxable distribution that is not subject to an early-distribution penalty offset by the deduction for a regular HSA contribution produces the same taxable result without any of the negatives of an HFD.  This is why in during entry of the code 4 Form 1099-R for a distribution from an inherited IRA TurboTax never asks whether the distribution was put in an HSA.

 

Regarding an example, a distribution of $3,500 from an inherited IRA adds $3,500 to AGI while a deduction for a regular $3,500 contribution to an HSA made with that $3,500 subtracts $3,500 from AGI, for a net change in AGI of zero.  An HFD results in $0 added to AGI and $0 deduction, for the same zero net change in AGI, but comes with all of the negatives of an HFD, particularly that the HFD becomes taxable and subject to a 10% penalty if the individual fails to be an HSA-eligible individual for any of the 12 months following the month of the HFD, hundreds of dollars on a $3,500 HFD.  If one simply obtains an IRA distribution that is not subject to penalty and makes a deductible HSA contribution for the same net change in AGI of zero, there are no consequences to failing to remain an eligible individual (other than any potential consequences under the last-month rule which would be less severe than the consequences with respect to an HFD).

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