• Transferring IRA money to an HSA may prove advantageous.cost of healthcare image by Cindy Haggerty from Fotolia.com
  
  The traditional IRA is a popular retirement savings tool in which you invest after-tax income so that it will grow tax-deferred. A Health Savings Account, or HSA, lets employees that have high-deductible health insurance plans (HDHPs) save pre-tax money for qualified medical expenses. Earnings on HSA deposits are tax-free as long as the money goes towards medical costs. With one exception, you can make a direct transfer from your IRA to your HSA once in your life.
  
  

Once in a Lifetime Event

• The IRS allows you to transfer IRA funds to an HSA just once in your life. The sole exception is if you switch from individual to family HDHP coverage in the same tax year. Say, for example, you make a $3,100 IRA-to-HSA transfer in February 2010 and then elect family coverage in June of that year. The IRS will allow you to put another $3,050 into your HSA from your IRA in accordance with the $6,150 family coverage contribution limit.
  
  

Contribution Limits

• The IRS sets limits on how much money you can transfer to an HSA from an IRA. These limits depend upon your age and whether your HDHP is for you alone or for your whole family. In 2010, the contribution limit for those with individual health plan coverage was $3,050 and $6,150 if your plan extended to your family. If you are age 55 or older, the HSA contribution limit is increased by $1,000. If the transfer from your IRA is equal to your HSA contribution limit, you are forbidden to make further contributions during that tax year. The IRS routinely revises health savings account contribution limits so check current tax law before you plan a transfer.
  
  

Continuing HDHP Coverage

• To prevent fraud, the IRS requires that you keep your HDHP coverage for a year after the IRA-to-HSA transfer is completed. For example, if you effect an IRA-to-HSA transfer on Aug. 15, 2010, you will have to hold onto your high-deductible health plan until at least Aug. 30, 2011. If your HDHP coverage lapses before a year has passed, the IRS will levy not only ordinary income tax but an additional 10 percent penalty on the transferred money.
  
  

Direct or Trustee-to-trustee Transfer

• Once you have decided how much money to transfer to your HSA from your IRA, you must arrange for a direct transfer of the funds. This means your IRA administrator or trustee will have to write a check directly to your HSA trustee. If the IRA trustee makes the check out to you for delivery to the HSA trustee, the IRS will consider the money an IRA distribution and will levy income tax, as well as a 10 percent penalty, on the funds.