Using an IRA to Fund HSA - Is the HSA Contribution Deductible

Forum|Forum|4 years ago
April 9, 2022
1 reply
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I have a client who received a 1099-R for $8,000. She told me that the "distribution" was used to fund her $8,000 HSA contribution for 2021.

I assume that the $8,000 IRA distribution remains OFF of page 1 of the tax return and the HSA contribution is NOT deducted on the return. Do I have that right? Kind of like a QCD.

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qbteachmt

Level 15

"She told me that the "distribution" was used to fund her $8,000 HSA contribution for 2021."

Does that mean, "This is how I raised the funds for my contribution to the HSA." Or, does this mean, "This was a Rollover/Transfer."

The word Contribution means "new money." As in, I did not want to sell lemonade on the street corner all summer, so I took a Distribution from my Traditional IRA and used it for whatever I wanted, including my HSA.

Or, it is not Contribution. There is a provision to transfer from a pre-taxed IRA into your HSA, once per lifetime. In this case, it's not new money. It's a Move:

https://www.investopedia.com/transfer-ira-money-to-an-hsa-4770819

"I assume that the $8,000 remains OFF of page 1 of the return and the HSA contribution is NOT deducted on the return. Do I have that right?"

There is no provision to Transfer or Roll funds to be a Contribution between accounts of any sort. Contribution is not the same as Transfer or Rollover, or even Conversion. Transfers, Rollovers and Conversions are not New Money. Contributions are New Money.

Read the article at that link, to help determine what happened. Ask her to clarify.

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qbteachmt

Level 15

Oh, let me summarize:

You have a 1099-R to report. That's for the money out. What you then report is money In.

The amount either is a distribution that got rolled/transferred to the HSA per the one-time option. That means it was pre-tax to pre-tax, as long as it meets the requirements for rollover/transfer to HSA.

Or;

If that was considered Contribution, then you have a taxable distribution and new money as HSA deductible contribution.

And if that was given as a check, with withholding, and it is being treated as a Rollver, that missing amount needed to be replaced (made up) in a Rollover process, or you have only a partial Rollover.

The HSA amount of $8k means this is Family coverage. And the taking of the money as distribution might be subject to early distribution penalty.

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