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Though all HSAs might seem the same—they store and let you invest your medical dollars—fees and investment prices can vary wildly between providers. Over time that can mean a high-fee HSA may leave you with thousands of fewer dollars to pay for health care costs.
But you aren’t bound to a particular HSA provider. You can move your account to a different company at any time, which may help you earn even more tax-free money to cover medical bills for the rest of your life.
What Is an HSA Rollover?
An HSA rollover is when you move money from one HSA provider to another.
How to Do an HSA-to-HSA Rollover
There are a few different ways to move an existing HSA to an HSA at a new company.
An HSA rollover involves informing your current HSA provider that you intend to close the account and move your HSA to another provider. The provider will then cut you a check, and it’s then your responsibility to get that money reinvested at your new HSA provider.
You are only allowed to do an HSA rollover using this check-based method once every 12 months. And honestly, even that one time is probably too much because if you fail to take the check from your old HSA and reinvest all the money in your new HSA account within 60 days, the IRS will consider it a taxable distribution. This means every dollar will be subject to income tax—and the IRS will slap on an additional 20% penalty because you withdrew the funds for a non-approved purpose. A trustee-to-trustee transfer is the safer way to go.
Trustee-to-Trustee HSA Transfer
You can direct your new HSA provider to contact your current provider and have them hash out the transfer without any check being cut to you.
Because the money moves directly from one HSA to another, and doesn’t involve you, there’s no risk of this turning into a taxable event. As an added bonus, there is no limit on how many trustee-to-trustee transfers you can do in a given year, meaning if you can consolidate multiple HSAs if you want to.
With a trustee-to-trustee HSA transfer, you first need to open your new account. Then, instruct that provider to make the transfer happen, and they’ll be able to handle the nitty gritty.
In-Kind HSA Transfer
If your current HSA is sitting in a cash/bank account, a trustee-to-trustee transfer is easy. But if your account is invested in stocks, mutual funds or exchange-traded funds, you need to check on your providers’ transfer rules. Some HSA providers allow an in-kind transfer, which means your investments are moved to your new provider. If that’s not allowed, it makes sense to first move your investment accounts into cash and then start the trustee-to-trustee transfer process. Luckily, because of HSAs’ tax-advantaged status, you won’t owe any money on gains made within the account.
Advantages of an HSA Rollover
- Lower your investment costs. If you are investing your HSA in mutual funds, the annual expense ratio for each fund will impact the growth of your money over the long term. In Morningstar’s recent survey of 11 HSA providers, it found that the cheapest balanced portfolio option (60% stocks and 40% bonds) had expense ratios that ranged between 0.02% and 0.68%. The average cost was 0.45%. The difference between those low fees and the higher ones can mean having thousands of dollars more in your account come retirement.
- Lower your account fees. If you use your HSA money to cover current bills (rather than investing it for retirement) you may run into an annual maintenance fee that can range from $25 to more than $70, especially if your balance is less than $2,500 or so. Morningstar found that three of the 11 providers never waive this maintenance fee. Some top providers don’t charge any fee, which may encourage a move if yours currently does. On the flip side, even if you intend to invest your HSA, rather than keep it in a cash account to cover current medical expenses, you may get hit with fees to buy securities. Most HSA providers don’t charge for this, but if yours does, you may opt for an HSA transfer to avoid it.
- Consolidate your accounts. Getting multiple HSAs under one roof is particularly valuable if you are looking to make managing your finances less of a time suck. Instead of logging into five accounts to check your balance, you can simply sign into one.
Disadvantages of an HSA Rollover
- You like your current HSA provider. If you have low fees and good investment choices, there’s no need to move.
- A little elbow grease is needed. Like any decision that involves closing down one account and opening another, there’s always a bit of time and form-filling involved.
- You may have limited access to your account during the transfer. If you anticipate wanting to make withdrawals from your HSA to cover current medical bills, you might want to check with the provider you’re leaving on how long they expect the rollover to take. It can be as little as a few days, or it may stretch out for weeks.
If you’ve already centralized all of your HSAs but are still looking to get more money for tax-free health spending, you may consider a lesser known type of HSA rollover: the IRA-to-HSA rollover, or qualified HSA funding distribution (QHFD) in IRS speak.
While it might not seem like an intuitive move, this maneuver allows you to transfer a portion of your individual retirement account (IRA) savings into an HSA. But, it’s important to note, you can only do this once in your life.
Because there will be no tax bill when you make your IRA-to-HSA transfer, you effectively get to avoid taxes on a portion of your retirement savings, as long as you then use them for qualified medical expenses. (Because withdrawals from Roth IRAs generally won’t be taxed in retirement, it doesn’t necessarily make sense to do a Roth-IRA-to-HSA transfer. That would actually be more limiting to your money because you would then only be able to use it toward health costs without penalty.)
Notably, money you move from a traditional IRA escapes required minimum distribution (RMD) requirements, so you won’t ever be forced to make withdrawals on it.
Keep in mind, though, that you can only transfer in up to your total HSA contribution limit for the year, meaning “your IRA rollover is less a rollover and more making your HSA contribution for the year with your retirement account, instead of your wallet,” says Christian Patterson, a CFP at Exencial Wealth Advisors, based in Frisco, Texas. You also must remain enrolled in a high deductible health plan (HDHP) for 12 months. If you switch to a different type of health insurance plan, your tax-free transfer will be disallowed, and you’ll owe taxes (plus a 10% penalty) on the amount you tried to roll over.
That said, if you know you’ll be in an HDHP for the next year and won’t be contributing the full amount to your HSA otherwise, you might consider an IRA-to-HSA rollover to lock in tax-free growth of money you’ve already deducted from your taxes. Just keep in mind that you’ll only be able to do this for $3,650 if you have self-only coverage and $7,300 if you have family coverage in 2021.