How Do HSA Rollovers Work When You Change a Job or Bank?
The secret's out: HSAs (health savings accounts) aren't just for healthcare expenses. That's their express purpose, and HSAs are a great vehicle for individuals who want tax-free withdrawals to pay for medical expenses, but you can also let them accumulate funds until retirement age. Does HSA roll over funds to new accounts, and how do these accounts work?
As Healthcare.gov explains, HSAs are where people with high deductible health plans (HDHPs) can set aside money on a pre-tax basis. They can withdraw HSA funds to pay for qualified medical expenses. HSAs can be an inflation hedge, among many other benefits of these accounts.
What's the definition of an HSA rollover?
First of all, there are a few different ways to define an HSA rollover. You might think about the fact that HSA money doesn't have to be spent within a certain timeframe (unlike a Flexible Spending Account). In a sense, the funds "roll over" to the next calendar year without your having to take any action. It's not technically an HSA rollover, however.
As Motley Fool notes, you can use two different methods for moving HSA funds into a new account: a transfer or a rollover. If you want to carry out an HSA rollover, you must have your HSA send you a check for your account's funds, then deposit those funds into a new HSA within 60 days.
A trustee-to-trustee transfer is another method for moving funds into a new HSA. You can request in writing that the trustee of your HSA shift your funds to another HSA provider.
How do HSA rollovers work?
As stated previously, an actual HSA rollover accomplishes the same thing as a trustee-to-trustee transfer. An HSA rollover requires more action on the account holder's part. If you're doing a real HSA rollover, the IRS has some rules to follow, or you'll incur penalties.
There are the steps to an HSA rollover:
- Contact your HSA provider online or by phone to initiate a rollover.
- Get a check from the HSA provider.
- Within 60 days, deposit the check into your new HSA.
- If you don't meet the 60-day deadline, the IRS will tax you on the rolled over amount plus a 20 percent penalty.
Why would you choose an HSA transfer over an HSA rollover?
If you want to move your HSA funds from your current HSA to a new one, you can do so either by a true rollover or through a transfer. A transfer may be the wiser choice because you aren't limited in frequency, and you avoid the risk of penalties by not making the 60-day rollover deadline.
How to conduct an HSA transfer:
- Contact your HSA provider online or by phone and request a trustee-to-trustee transfer.
- Let the trustee handle the transfer of your HSA funds into the new HSA.
What are the benefits of HSA rollovers?
Perhaps you're wondering why someone would initiate an HSA rollover, whether a true rollover or by trustee-to-trustee transfer. Some of the common reasons for HSA rollovers include:
- Changing employers and wanting to have an HSA with the new employer
- To consolidate multiple HSAs for simplicity
- To lower fees like expense ratios and maintenance fees
Remember the benefits of choosing a transfer versus what the IRS calls an HSA rollover. A rollover comes with the risk you'll be taxed on the withdrawn funds plus a 20 percent penalty if you fail to make the deposit into your new HSA in the allotted 60 days. Plus, transfers are less work for the account holder and you can do them as often as you wish, not just once a year.
What are the main benefits of HSAs and HSA rollovers?
An HSA is a smart investment tool for a number of tax-related reasons. You get to reduce your taxable income through your contributions, plus you don't pay taxes on any withdrawals used for qualified medical expenses. Your earnings also grow tax-free, making it a great vehicle for retirement savings. If you don't use the funds for medical costs, HSA funds can be part of your retirement income.
What are the HSA rollover limits?
The IRS limits how much a person can contribute yearly to an HSA. For individuals, it's $3,850 in 2023, and for a family, it's a maximum of $7,750. Those aged 55 and older can also make a $1,000 catch-up contribution. If you exceed the maximum contribution limits, you'll pay an annual 6 percent excise penalty tax, unless you withdraw the extra amount before that year's tax deadline.
To qualify for an HSA, 2023's minimum deductible on a HDHP is $1,500 for an individual and $3,000 for a family. Maximum out-of-pocket amounts are $7,500 for individuals and $15,000 for families.