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Yes, you can transfer your Health Savings Account (HSA) balance from one provider to another. This is especially helpful if you leave your employer.
HSAs (Health Savings Accounts) are a great tax benefit for people with high-deductible health plans. But as you move from job to job, your HSAs may end up scattered among several different HSA providers or administrators. And at some point, you may want to do an HSA transfer.
There is a way to clean up all of these accounts and consolidate them into one account. However, there are rules you need to know and you need to understand how the taxes can be handled.
This article will explain how to do this and when you might want to use an HSA transfer.
Related: If you're looking for a place to roll over your HSA, check out our list of the best HSA providers.
Transfer your HSA
If you have multiple HSAs, paying for medical expenses can become a hassle. Eventually, the money in one account will run out and you'll have to use another just to pay a bill. A better solution is to consolidate all of these accounts into a single one. This way, you can then use just one debit card to pay for medical expenses. Consolidation can also save on administrative fees.
To move money from one HSA account to another, you can use a wire transfer, which is a direct movement of money from custodian to custodian (also called trustee to trustee). With an HSA transfer, you never come into contact with the funds during the transfer. This is important because taking possession of the funds can invalidate the transaction and result in tax consequences.
Note: Transferring funds does NOT count toward your annual HSA contribution.
To complete an HSA transfer, you must be the owner of both HSA accounts. Call the HSA administrator of the account you want to transfer and ask how to get started. Once the transfer begins, all you have to do is wait for it to complete. Once it's complete, you'll likely need to call the HSA administrator (who you transferred money from) again and ask them to close the account.
You can make an HSA transfer as often as you like – there is no limit. These transfers also do not affect your annual HSA contributions or income. In addition, there is no tax return associated with an HSA transfer.
For example, if you want to use Fidelity as your new HSA provider, you can complete the entire process with Fidelity and never have to talk to your old company (except when you want to close the account).
Note: A transfer can take 2 to 6 weeks to process and in our experience, the process with virtually all “old-fashioned” HSA providers is terrible in terms of ease of use and timeliness.
Transfer of fixed assets
With this type of transfer, you move investment holdings (e.g. stocks, bonds, mutual funds) to another HSA account. The positions are transferred (in most cases) while maintaining their cost basis. This eliminates the need to liquidate positions just for a transfer.
However, not all HSA administrators allow this. If this happens, you will need to liquidate your holdings. Liquidations can have tax consequences in some states. You should work with your HSA administrator and tax advisor before initiating this type of transfer.
Note: Some managers (particularly at larger companies) offer very specialised or specific funds not offered elsewhere. These are unlikely to ever be transferred in kind.
HSA rollover
An HSA transfer is different from a rollover. The most important difference is that you can only make one HSA transfer per year.
With an HSA transfer, your provider will send you a check that must then be deposited into your other HSA account. You have 60 days between withdrawal and deposit to complete the process, otherwise the amount withdrawn will be taxed and subject to a 20% penalty. After 60 days, the amount withdrawn is considered a withdrawal and is therefore taxed.
Rollovers do not count toward your annual contribution, but they must be reported on your tax return. A rollover is riskier than a simple transfer because it is less automated and incurs higher costs if you do not follow the instructions. You must wait 12 months from the date of the last rollover before you can initiate another rollover.
Note: An HSA transfer does NOT count toward your annual HSA contribution.
IRA to HSA rollover
There is another type of HSA transfer that involves retirement accounts. You can transfer funds from your traditional IRA or Roth IRA to your HSA account. This can only be done once in a person's life.
An IRA to HSA transfer affects your contributions. Your annual HSA contribution limit will be reduced by the amount of the IRA to HSA transfer.
Funds in an IRA are tax-free. Once contributed to an HSA, they are tax-free. A SEP and a Simple IRA can also use this strategy, as long as the IRA is no longer considered “current” by the IRS.
If you go this route, you'll definitely want to work with your HSA administrator.
Instead of doing an IRA to HSA rollover, you may want to just contribute to your HSA. The contributions are tax-advantaged and won't hit your retirement account, which is money you can never get back.
Tax consequences of an HSA transfer
In 48 states, an HSA transfer has no tax consequences.
There are currently two states (California and New Jersey) that do not follow federal law when it comes to HSAs. There are currently bills in the works, but currently an HSA in these states is basically treated like a taxable brokerage account.
For example, you cannot deduct your HSA contribution from state income taxes, and you must also report your capital gains and dividends on your state income tax return.
With rollovers, a custodian transfer is not a taxable event (although your underlying HSA may have its normal taxable events). However, a rollover that you must report is a taxable event, and you will pay taxes on any gains under the rollover.
Therefore, residents of California and New Jersey are advised to make HSA transfers only.
Diploma
There are several ways to contribute money to an HSA account:
Each method is used for a specific reason and some come with limitations. The easiest ways to transfer money into an HSA account are direct deposits and wire transfers. Rollovers are more complicated and the rules must be followed carefully to avoid taxes and penalties.
We strongly recommend that you speak with a tax advisor about your rollover and make sure you report it correctly on your tax return.
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