Basic Rules for IRAs
A taxpayer must have earned income to contribute to an IRA. Rental income, dividend or interest income, or income from a deferred compensation plan doesn’t count under IRS rules. Annual contribution limits for 2022 are $6,000 per year, or $7,000 if you’re age 50 or older. For 2023, the limits are $6,500 for those under 50 and $7,500 for those aged 50 and older. These limits include contributions made to both Roth and traditional IRAs. However, they don’t apply to rollover contributions or qualified reservist repayments. If you make less than the contribution limit, your contributions are limited to the amount of compensation that is taxable. You used to have to stop contributing to your traditional IRA by age 70 1/2, but now you can keep contributing to it indefinitely as long as you’re working. You get a tax deduction for the amount you contribute to a traditional IRA or a 401(k) if you’re eligible, up to the annual contribution limits. Income limits apply for these deductions as well. The money you place in your IRA grows tax-deferred; then, you pay taxes when you withdraw it in retirement. You must begin to take required minimum distributions (RMDs) by age 72; if you don’t, you’ll face an excise tax.
Basic Rules for HSAs
You get the same tax deduction with an HSA when you contribute money, but it comes back out tax-free (including interest and earnings) as long as you use the money for medical expenses and qualified health insurance premiums. Contributions made by your employer aren’t included in your taxable income, and the money grows tax-deferred. Contribution limits are $3,650 for the year for individual plans or $7,300 for family coverage in 2022. The limits are $3,850 for individual plans and $7,750 for family coverage in 2023. HSA funds can be used to pay for health insurance after age 65. This includes Medicare Part B and long-term care premiums. The funds can’t be used for health insurance premiums by those under age 65, though they pay for qualified medical expenses such as co-pays, deductibles, and dental care.
HSAs vs. IRAs
You can use the HSA money just like funds in your IRA or 401(k) after you reach age 65 if you don’t need the funds. You’ll pay taxes on withdrawals that aren’t used for medical reasons, however, just as you would if you were to withdraw money from an IRA. Most withdrawals made from an IRA before age 59 1/2 will result in a 10% penalty tax, but some exceptions apply. These include up to $10,000 withdrawals for first-time homebuyers and medical expenses that exceed 10% of your adjusted gross income (AGI). Funds are available from an HSA at any time for qualified medical expenses. There is no AGI percentage threshold. The penalty tax increases to 20% if the money is used for anything other than medical costs before you reach age 65. The contribution limits for HSAs based on income are lower than those for IRAs, and HSAs have no RMDs, while IRAs do.
Rollovers from an HSA to an IRA
HSA funds can’t be rolled over into an IRA account. There’s also no reason to do so, because you preserve your right to use the funds tax-free for medical costs at any time with an HSA.
Rollovers from an IRA to an HSA
A tax rule allows a one-time tax-free transfer from your IRA to an HSA. This isn’t a rollover, because it counts toward your annual HSA contribution limit, but it allows you to move a small amount of money needed for medical expenses from an IRA, where you would have to pay taxes on it, to an HSA, where withdrawals would be tax-free for medical purposes.
