Can I roll over money in an IRA to an HSA?

Kimberly Lankford for Kiplngers/Chicago Tribune writes: Q. Can I make a tax-free rollover from my IRA to a health savings account? What are the rules?

A. Yes, you can roll money over from an IRA to an HSA as long as you have an HSA-eligible high-deductible health insurance policy (to qualify to make HSA contributions in 2013, your health insurance policy must have a deductible of at least $1,250 for individual coverage or $2,500 for family coverage). After the money is rolled over, you may withdraw it from the HSA tax-free for medical expenses in any year.

You can make a tax-free rollover from your IRA to an HSA only once in your lifetime, and the amount is limited to the maximum HSA contribution for the year minus any contributions you've already made for the year. For 2013, the maximum HSA contribution is $3,250 for individual coverage or $6,450 for family coverage, plus a $1,000 catch-up contribution if you're 55 or older.

If you have enough money outside the IRA, it's usually better to contribute new money directly to the HSA rather than make the rollover. That way, you can take a deduction for your HSA contribution and max out your IRA contribution for the year, too.

However, a rollover can help you beef up your HSA, especially if cash is tight. It's much better to roll over money from a traditional IRA than a Roth, because you can already access Roth contributions tax- and penalty-free at any time, and you can withdraw Roth earnings tax-free after age 59 1/2. And rolling over money from a traditional IRA avoids the tax bill and potential penalty you would have if you withdrew the money from the IRA.

If you want to make a rollover, contact both your IRA and HSA administrators and tell them that you want to make a direct transfer. Also keep in mind the timing of the transfer. You must continue to be enrolled in an HSA-eligible high-deductible health insurance policy for 12 months after you make the transfer, says Roy Ramthun, of HSA Consulting Services, in Washington, D.C. Otherwise, the money transferred will be considered a taxable withdrawal from the IRA, even though it remains in the HSA; you'll owe taxes on the withdrawal and may have to pay a 10-percent early-withdrawal penalty if you're under age 59 1/2.