The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: Chyups on July 12, 2018, 04:49:05 PM
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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) (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... (https://blog.hefren.com/10-things-you-might-not-know...)
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The IRA to HSA transfer looks legit, though I'm not seeing how that actually helps here. Seems to me that you could instead just take a regular withdrawal from the inherited IRA (adding to your income) and contribute that much to your HSA (subtracting from your income), and the net effect on your taxes would be the same as if you did the direct transfer. This way you would also keep your once-in-a-lifetime IRA to HSA transfer option for later if there's some scenario where it actually helps to use it.
As to other options for shifting inherited IRA funds into another tax shelter, I'm not aware of any that would let you avoid recognizing the IRA withdrawal as income.
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Can you not use either your or a spouse's tax-deferred accounts to trickle the money from the inherited IRA to your own IRA or 401(k)?
E.g., you need to take the RMD of course... but can you bump your IRA contribution, 401(k), SEP...or those of a spouse by the same amount?
More discussion here, Right Way to Handle an Inherited IRA Account (https://evergreensmallbusiness.com/right-way-to-handle-inherited-ira-accounts/), but the above sentence explains the gist of idea...