I’ve been looking for the solution to this problem for about 2 years now, and I’ve only found 1 interesting thing other than optimizing your taxable income. This is something you can do:
You can roll over money directly from your Inherited IRA to your HSA tax/penalty free. This is known as the “One-Time Qualified HSA Funding Distribution.” Appropriately named, you can only do this once in your lifetime. There are rules to this though.
“The Testing Period”
If you do the transfer, you must also commit to staying with an HSA-eligible high deductible health plan with no other coverage for 12 months. If you fail the commitment, the transfer becomes taxable and you’d have to pay a 10% penalty.
If an individual remains an eligible individual during the entire testing period, then no amount of the qualified HSA funding distribution is included in income and the 10 percent additional tax does not apply.
I haven’t been able to completely confirm whether or not this will increase your adjusted gross income. (AGI) Mainly because blog sources aren’t the best, but maybe there’s a tax professional in our group that could confirm what I’ve said here. If it does, then there is no point in doing this rollover, but if it doesn’t, you can max out your HSA for the year and successfully transfer that money from a taxable account (your inherited IRA) to a non taxable account (HSA).
There are other rules too such as:
Rollover can count as a RMD.
A beneficiary of a traditional or Roth IRA is eligible to take a qualified HSA funding distribution from an inherited IRA to fund his/her HSA. Any required death distribution amount(s) must be taken prior to the qualified HSA funding distribution.
This isn’t a huge win with a ton of payoff, but I think that this qualifies as small win that fits within the “aggregation of marginal gains.”
Does anyone have any other ideas on how to move money from a taxable inherited IRA to non taxable accounts/assets? I'm hoping someone has some experience with this. Thanks for the help!
Sources:
https://www.irs.gov/irb/2008-25_IRB (Ctrl F: "Inherited IRA) (Ctrl F: Inherited IRA)
https://blog.hefren.com/10-things-you-might-not-know...