A health savings account (HSA) is a type of savings account that allows you to set aside pre-tax money for certain medical expenses. Available to individuals with high-deductible health plans (HDHP), HSAs offer a powerful way to cover medical costs, boost your retirement savings, and lower your tax liability with their triple tax advantage.
However, not all HSAs are created equal. Your provider may charge high maintenance fees or lack investment options. Even if you’ve found a great provider, you may want to switch to a new one when you change employers. Luckily, there are several ways you can open and fund a new HSA. Here, we review the advantages and disadvantages of one common strategy: the HSA rollover.
What Is an HSA Rollover?
If you hold multiple HSAs or are unsatisfied with your current provider, you can consolidate or transfer funds through an HSA rollover. A trustee, such as a bank or previous HSA provider, gives you, the account holder, a check. You’re then responsible for depositing the funds into your new account.
The Advantages
You can potentially reduce account fees
HSA providers often charge annual maintenance fees for accounts being kept as cash for healthcare coverage. Even if you choose to invest your HSA funds, you may have to pay a fee to purchase securities. Rolling over to a new provider who doesn’t charge fees can help eliminate extra spending and maximize the money in your account.
You can more easily manage your funds
In some cases, people keep multiple HSA accounts open. For example, you may want to receive employer contributions while funding a separate, no-fee account. However, if you’ve left your job and no longer receive contributions, it might be time to consolidate your HSAs. Using an HSA rollover, you can put all of your funds under one roof where you can more efficiently manage them.
You can gain access to new investment options
On top of management fees, many HSA providers also charge investment fees or require a minimum account balance before you can begin investing. HSA rollovers are one method of moving your money to a new account provider that charges less and offers investment opportunities that align better with your financial needs and goals.
The Disadvantages
You can only conduct one rollover each year
Only one rollover is allowed every 12 months. This means the rollover process could take years if you have multiple HSAs you want to centralize. Individuals needing to make more than one rollover in a given year may benefit more from a trustee-to-trustee transfer. With these transfers, a trustee moves money from one HSA directly to your new HSA, and there’s no limit on the number of transfers you can make in a given year.
You must complete the rollover within 60 days
If you take longer than 60 days to deposit your money into your new HSA account, the Internal Revenue Service (IRS) will consider the transfer a taxable distribution, and you’ll owe income tax plus a 20% penalty.
It requires more administration
Unlike a trustee-to-trustee transfer, HSA rollovers require some administrative work from the account holder. If you cannot dedicate the necessary time and effort, you risk making a costly misstep, such as missing that 60-day rollover window.
Is a Rollover Right for You?
You can fund an HSA account in many ways, including HSA-to-HSA rollovers, IRA-to-HSA rollovers, in-kind transfers, and more. How do you know which is right for you? At Ironwood Wealth Management, we’re here to help you find the comprehensive financial planning strategies that best suit your unique financial situation. Reach out today to learn more.
