One-time transfer from Traditional IRA to HSA

[jcaps123]

I have a one-time transfer from Traditional IRA to HSA (nontaxable transaction as I meet the requirements) and entered in Turbo tax to select the one-time transfer option.  It shows up on line 10 of 8889 as qualified fund distribution.   However, it is being put in as a taxable transaction (HFD) on the 1040 line 4b.

I have another transaction from my spouse's traditional IRA to convert to Roth IRA.  This transaction is being treated as non-taxable (not correct) and is not being put in line 4b.

Note that when I change the input for the one-time IRA to HSA rollover as a regular IRA rollover (uncheck box indicating it is a rollover to an HSA) then the 2 transactions are treated properly (HSA is non-taxable and conversion is taxable).  It doesn't make sense that these two transactions are impacting each other as they are two separate transactions (one on my HSA which has family coverage for both of us) and the other a Roth IRA conversion on my spouse's account.

My only solution is to file with the box unchecked as an HSA distribution at this point (so it gets treated as IRA rollover) as that gets me the correct tax treatment.  Please advise if there is another option or if this is a bug in TurboTax.

[Opus 17]

What are the codes in box 7 of the 1099-Rs for the two transactions?

I had a rollover from a 403b to an IRA, and a funding distribution from the IRA to an HSA, and Turbotax handled them correctly.  The rollover should be code G (for a pre-tax 403b) and the funding distribution should be code 1.  Of course, I don't have a spouse.

Note that a rollover from a traditional IRA to a Roth IRA is taxable, unless it is an after-tax basis (non-deductible) IRA, which would require form 8606 ("backdoor Roth IRA").  Is this a backdoor Roth?

[jcaps123]

A correction to the above in that I since discovered that the error that is occurring is that the HSA distribution is included in line 1a as a Rollover and also in line f as a HSA funding distribution.  I incorrectly stated that the my spouse's Roth IRA conversion was impacted (in fact, it was not so this part can be disregarded).  

The box 7 distribution code in the 1099-R is G in case that has an impact. 

[jcaps123]

In my case the code 1 for HSA funding distribution would be incorrect since that is for early distribution (I am above 59 1/2 so it is not an early distribution).   However, I changed my 1099-R from a code G (direct rollover) to a code 7 (normal distribution) and then updated the taxable amount to the amount of the distribution.  This got me the correct result (removed it as taxable since it is a qualified HSA distribution). 

One concern is that the distribution was done as direct transfer rather than a normal distribution so code 7 isn't right.  I hope that differences in the 1099-R box 7 code won't get flagged by the IRS.

[Opus 17]

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@jcaps123 wrote:

One concern is that the distribution was done as direct transfer rather than a normal distribution so code 7 isn't right.  I hope that differences in the 1099-R box 7 code won't get flagged by the IRS.

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If you look at the code, an HSA funding distribution is specifically called a "distribution".  26 USC §408(d)(9) to be exact.  Distributions from an IRA would be code 1 or in your case, code 7.  Even though it is done by direct bank transfer, it is still a "distribution" as defined by law.  If your IRA broker used code G, you need to manually change it in Turbotax to code 1 or 7 to get the program to handle it correctly.  (I am in the exact same situation.)  At worst, you would get a letter from the IRS asking for clarification, and it's an easy situation to explain.    In other words, the problem is that the broker used the wrong code.  Turbotax is correct in not populating the QHSAFD questions for a code G. 

Also, it's worth noting that the only real value of a qualified HSA funding distribution from an IRA is to do it before age 59-1/2, so you save the 10% penalty.  If you are over age 59-1/2, you could just as easily have taken a normal withdrawal (taxable) and then made a direct contribution to the HSA in the same amount (which creates a tax deduction that offsets the tax.)