Do you own one or more HSAs? Are you curious as to how to rollover or transfer an HSA? If you have one or more HSA accounts, you might be considering moving the account(s) to a different HSA custodian.
You may gain several benefits by moving your HSA(s) to another custodial bank. We’re going to tell you what those benefits might be. And we’ll share what you need to know before you rollover or transfer an HSA account.
More importantly, we’ll tell you exactly how to rollover or transfer an HSA to a new bank.
In This Article
How to Rollover or Transfer HSA Funds
It’s essential to know how to transfer or rollover HSA funds correctly. If you make a mistake when moving or rolling over HSA funds, you could be setting yourself up for a huge tax hit.
You see, while HSA contributions are tax-deductible, withdrawals to your HSA are only tax-free if you use them for qualifying medical expenses. If HSA withdrawals are not used for qualifying medical expenses, the IRS considers the amount withdrawn for non-qualifying medical expenses as taxable income.
That means you could have to claim HSA monies meant for a rollover as taxable income. Also, you could pay a 20% penalty on any funds you withdraw and don’t use to pay qualifying medical expenses.
This penalty doesn’t apply when you’re over 65. Those over 65 can use HSA funds for any reason. However, the funds are still taxable if you don’t use them for qualifying medical expenses.
The point is that if you make an error when trying to rollover or transfer an HSA, you could be setting yourself up for some unnecessary tax burdens.
Here’s some information on what the difference is between a rollover and a transfer of an HSA. After we share that information, we’ll show you how to transfer or rollover your HSA funds correctly.
What’s the Difference Between a Transfer and a Rollover?
While transfers and rollovers might seem similar, there is a difference between the two. And it’s an important difference.
A transfer, by definition, is when your HSA funds go directly from one custodian to another. You never have possession of the funds in your hands. You are allowed an unlimited number of HSA transfers each year.
Furthermore, you don’t need to report HSA transfers to the IRS. The reason for this is that a transfer doesn’t technically count as drawing HSA funds out. You’re merely having one custodian move your HSA funds to another custodian.
Rollovers work a bit differently. With an HSA rollover, the HSA custodian you wish to move your HSA funds sends you a check for the HSA balance.
You then have 60 days to deposit the amount sent to you into another HSA account. If you don’t transfer the funds to another HSA within those 60 days, you will have to report it as a distribution.
That means you’ll be taxed on it because it’s considered income. Besides, you may have to pay a 20% penalty on the funds. The IRS will impose a 20% penalty if HSA funds are withdrawn and not used for qualifying expenses.
As mentioned earlier, this penalty won’t apply if you’re age 65 or over. After age 65, you can use HSA funds for any reason. However, you’ll still be taxed on any withdrawals.
It’s important to know that rollovers don’t count toward your maximum annual contribution limit. To explain, it is because you already had the funds contributed with another custodian.
You can lessen your tax burden if you have qualifying medical expenses that you haven’t yet been reimbursed for if you don’t put the rollover funds into another HSA.
However, if you don’t have qualifying medical expenses and don’t get that money to another HSA custodian within 60 days, you’ll be responsible for paying taxes on the withdrawn amount (and possibly a 20 percent penalty) if you’re under 65 years of age.
Now that you’re clear on the differences between a rollover and a transfer let’s learn how to transfer or rollover your HSA funds.
How to Transfer HSA Funds
Transferring HSA funds is pretty simple. You start by opening an HSA account and transferring your other HSA funds to the new custodian you’ve chosen.
In the process of opening that account, your new custodian will offer you a Direct Transfer Request Form. You can then fill out that form (and sign it) and mail it to your HSA’s current custodian.
The current custodian of your HSA will review the form. Once it’s found to be valid and complete, the custodian will transfer the money (usually by check) to the new HSA custodian you’ve chosen.
Your new HSA custodian should contact you when the transfer is complete.
How to Rollover HSA Funds
When you’re rolling over HSA funds, the process is a bit different. You’ll still start by opening an HSA account with the new custodian bank you’ve chosen. But you’ll have to contact your current HSA custodian directly and request a rollover.
Your current custodian will give you instructions on how to receive rollover funds for your HSA. After you receive the HSA funds from the current custodian, you’ll fill out the Rollover Request Form from your new HSA custodian.
You’ll send that to your new HSA custodian, along with the check you’ve received from your HSA’s current custodian. Then your new HSA custodian will deposit the funds into your new HSA account.
Remember, you’ve got 60 days to complete this process. If you don’t, the IRS will consider the rollover funds as an HSA withdrawal and tax you accordingly.
Where to Transfer or Rollover an HSA
You might be wondering where you should transfer or rollover your HSA funds. The bank you choose to move your HSA funds to is up to you.
However, you should be choosy when deciding where to open a new HSA account. One HSA custodian we like is Lively.
Lively lets you open an HSA for free. And there are no monthly fees. Also, Lively partners with TD Ameritrade. Their collaboration means you can invest your HSA funds for free as long as they are inside of a Lively HSA.
You can buy stocks, bonds, mutual funds and more, free of all trading fees and commissions (other fees may apply). And with TD Ameritrade’s Lively partnership, there’s no minimum balance you need to have to start investing.
Plus, Lively offers online banking, debit cards and paperless statements. Note that you’ll have to open a separate TD Ameritrade investing account to invest your Lively HSA funds. But Lively will help walk you through all of that.
Another option is HSA Bank. HSA Bank offers several benefits such as low HSA management fees ($2.50 per month as of this writing), self-directed investing and a 24/7 customer service center.
HSA Bank partners with TD Ameritrade for investing your HSA funds too. However, there is a $1,000 minimum balance to start investing with TD Ameritrade through HSA Bank. But the trades are commission-free.
There are several options for opening or transferring an HSA. Be sure to read the fine print before choosing the right one for you.
Benefits of Transferring or Rolling Over an HSA
So, why would you want to transfer or rollover your HSA accounts? There are several reasons why doing so might be beneficial.
First, having several HSA accounts makes tracking your HSA health more difficult. If you have to keep track of three or four different HSA accounts, it might be difficult for you to find the time or remember to analyze each one regularly.
Second, if you have several HSA accounts, you’re likely paying HSA management fees to a number of companies. Consolidating your HSAs means you’ll only be paying fees to one institution.
And, depending on the HSA Bank you choose to rollover to, you could be paying less if you consolidate all of your HSAs to one bank.
Transfer and Rollover Limits
You are allowed to complete an HSA rollover once per year. However, you can complete as many HSA transfers in a given year as you wish.
Suffice to say, the transfer of HSA funds is less risky than the rollover of HSA funds. By transferring, you’re ensuring you don’t have to report the move to the IRS. Plus, you’ll make sure you won’t have to count the funds as taxable income.
If you’re unhappy with your current HSA custodian(s) or just want to consolidate your HSA accounts, consider learning how to roll over or transfer an HSA.
Check out the various HSA rollover or transfer options for your HSA. Then choose the HSA custodian or bank that’s right for you. Choosing an HSA custodian with lower fees could increase the amount you have in your HSA over time.
The money you might save in annual fees could increase your balance thanks to the ability to earn more in compound interest.
Have you ever done a rollover or transfer of an HSA? Share your experiences in the comments section.