You can tap money from your IRA tax-free by rolling it over to a health savings account. Find out who can benefit the most from this strategy.

A HEALTH SAVINGS account is one of the most powerful tax-advantaged savings tools, but many people overlook its benefits. Your contributions are tax-deductible (or pretax if through your employer), the money grows tax-deferred and it can be withdrawn tax-free for eligible medical expenses at any time. You can use the HSA money to pay your health insurance deductible, copayments and other out-of-pocket medical bills. Or you can keep the money growing in the account for years and even use it to cover health care expenses in retirement.

The tax law lets you make a one-time rollover from an IRA to an HSA, transforming the tax-deferred retirement savings into an account you can tap tax-free. But the law is limited, and you need to follow a specific procedure to avoid an unexpected tax bill. Here’s what you need to know.

How to Roll Over Money From an IRA to an HSA

Rolling over money from an IRA can help you supercharge your HSA. It’s a way to take money that would have been taxable when withdrawn from the traditional IRA and let you access it tax-free for eligible medical expenses.

You can only make the rollover if you’re eligible to make new HSA contributions, which means that you must have an HSA-eligible health insurance policy with a deductible of at least $1,400 if you have self-only coverage or $2,800 if you have family coverage in 2020 and 2021. The amount you can roll over from the IRA is limited to your maximum HSA contribution for the year, which is $3,550 if you have self-only coverage or $7,100 for family coverage in 2020 ($3,600 for self-only coverage or $7,200 for family coverage in 2021). If you’re 55 or older, you can contribute an extra $1,000 for the year.

The rollover only makes sense with a traditional IRA, which would otherwise be taxable, not a Roth IRA, which can already be withdrawn tax-free.

Any amount you roll over reduces your maximum HSA contribution limit for the year. For example, if you have self-only health insurance in 2020 and you roll over $3,000 from an IRA, then you can only contribute $550 to the HSA for the year. You can only make an IRA-to-HSA rollover once in your lifetime, so you need to think carefully about the best time to make this move.