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SSDI and HSA health plan

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What is the name of your state?
Ohio
I am receiving full disability but am in that two year window where I am not eligible for Medicare so am paying out of pocket for my health care plan. For 2020 I will have no earned income, I am 59 years old.

If I get a HSA type health plan for 2020 can I fund the account with money out of my 401(k) and avoid paying tax on the 401(k) money? I know I can make 401(k) withdraws penalty free since I am on disability but don't know the law regarding moving the money to a tax deferred HSA.
 


LdiJ

Senior Member
What is the name of your state?
Ohio
I am receiving full disability but am in that two year window where I am not eligible for Medicare so am paying out of pocket for my health care plan. For 2020 I will have no earned income, I am 59 years old.

If I get a HSA type health plan for 2020 can I fund the account with money out of my 401(k) and avoid paying tax on the 401(k) money? I know I can make 401(k) withdraws penalty free since I am on disability but don't know the law regarding moving the money to a tax deferred HSA.
You cannot do a rollover from a 401k to an HSA. You CAN do a rollover from an IRA to an HSA. If your 401k plan is with a former employer, then you might be able to roll the 401k over into an IRA, and then do the HSA rollover from the IRA. That would avoid tax altogether.

However, if you are getting just enough money from the 401k to cover the HSA contribution, AND the SSDI is your only income, (or only family income) then its unlikely that you would end up paying any income tax anyway. However if you have any other income or any other family income, then you would need to consult a tax professional, because you risk making part of your SSDI taxable, on top of the distribution.
 
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adjusterjack

Senior Member
You'll always pay the ordinary income tax on a distribution. But if you are 59 1/2 you won't pay the additional 10% penalty.

If I remember correctly, the contribution to the HSA is deductible, so there may be an offset.
 

LdiJ

Senior Member
You'll always pay the ordinary income tax on a distribution. But if you are 59 1/2 you won't pay the additional 10% penalty.

If I remember correctly, the contribution to the HSA is deductible, so there may be an offset
.
There is a deduction however it comes after the calculation for the amount of SSDI that might be taxable, therefore again, the OP should consult a tax professional before going that route.
 
Thanks for the replies. I am in the process of rolling over my 401(k) into an IRA, just waiting for the check to arrive, so I mis spoke(or typed) mentioning the 401(k), the money would actually come out of the IRA.
 
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Taxing Matters

Overtaxed Member
Thanks for the replys. I am in the process of rolling over my 401(k) into an IRA, just waiting for the check to arrive, so I mis spoke(or typed) mentioning the 401(k), the money would actually come out of the IRA.
Then you may do a one time (meaning you can do this only once in your lifetime) rollover of funds from the IRA directly to the HSA. This is known as a qualified HSA funding distribution. There are a few rules you need to be aware of for this, which is covered in the link I provided to the IRS Publication 969 discussion of the topic.
 

ajkroy

Member
Just to be clear, unless I missed it, OP cannot fund an HSA without a qualifying high-deductible health plan to go with it.
 

LdiJ

Senior Member
Thanks for the replies. I am in the process of rolling over my 401(k) into an IRA, just waiting for the check to arrive, so I mis spoke(or typed) mentioning the 401(k), the money would actually come out of the IRA.
I hope you are not waiting for a check to arrive. I hope that you made it a trustee to trustee rollover and will do the same for the HSA contribution. Even if you do get a check for the rollover into the IRA, do not do it that way for the HSA rollover.
 
I hope you are not waiting for a check to arrive. I hope that you made it a trustee to trustee rollover and will do the same for the HSA contribution. Even if you do get a check for the rollover into the IRA, do not do it that way for the HSA rollover.
I am waiting for a check! lol. That's the way the 401(k) rollover into an IRA ended up, but it will be a FBO check.

Turns out I'm not eligible for an IRA to HSA rollover anyway. The HSA/high deductible plan needs to be in effect for a 12 month period for me to reap a tax free contribution, since I will become eligible for Medicare in Oct. of 2020 that eliminates the option for me.
 

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