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Tax-Free Money for Medical Expenses

Individuals covered under a high deductible health plan (HDHP), have no other health coverage, are not enrolled in Medicare, and cannot be claimed as a dependent on someone else’s tax return are eligible for an HSA account.  Eligible individuals are allowed a one-time only tax-free rollover from a traditional or Roth IRA to an HSA.  SEP or SIMPLE IRA plans do not qualify.  The amount rolled over into the HSA is limited to the maximum HSA contribution amounts and is nondeductible.  The amount of the rollover reduces the amount you can contribution to an HSA.  The rollover must be a direct trustee to trustee transfer. 

You must remain an eligible individual through the 12th month after the rollover is made.  For example, if the rollover from the IRA to the HSA happened on July 20, 2009 the individual must remain eligible to qualify for an HSA plan through July 31, 2010.  If you are no longer eligible during the 12 month time-frame (other than death or disability) the amount of the rollover must be included in income in the year you are no longer eligible and is subject to a 10% additional tax.

If you make a rollover contribution in which during that month you have self-only HDHP coverage a second tax-free rollover is allowed in the same tax year if you change to a family HDHP coverage in a later month.

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