Individual retirement arrangements and health savings accounts offer tax-sheltered growth, but if you have a medical emergency and need money to pay the resulting bills, only the HSA guarantees you tax-free distributions. A 2006 law allows you to transfer, not roll over, funds from your IRA to your HSA but places a number of restrictions that limit the transfer's usefulness.
You're only permitted to transfer money from a traditional IRA or Roth IRA to an HSA. Transfers from other IRAs, such as SEP or SIMPLE IRAs, are not permitted if the IRA is "ongoing." Ongoing means that your employer made a contribution to the plan for the year of the transfer.
If you're not otherwise eligible to contribute to an HSA, you can't make the transfer. In addition, you're only allowed to transfer funds from an IRA to an HSA once in your lifetime, so if you've already done it, you're no longer eligible. The only exception is if you made a transfer early in the year at a time when you had self-only coverage and later in that same tax year you change to family coverage. In that case, you can transfer up to the increased contribution limit.
Your transfer is limited to, and counts against, your HSA contribution limit for the year. For example, if your HSA contribution limit is $6,150 and you've already contributed $1,150 to your HSA, you're limited to transferring $5,000 from an IRA to your HSA. In this case, if you transferred $5,000, neither you nor your employer could contribute any more to your HSA for the year.
You won't owe any taxes as a result of the transfer, but you must still report it on your income taxes using Form 8889. Once the money is in the HSA, you can take distributions tax-free for qualified medical expenses no matter what your age, which you can't always do with an IRA. So, if you need the money for hospital bills immediately, a transfer makes sense. However, if you can afford to make the contribution out-of-pocket, that's usually the better option because you won't raid your retirement and you'll get a tax deduction for the HSA contribution.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."