HSA rollover vs. HSA transfer: what's the difference?

If your employer offers medical benefits as part of your compensation package, you may have access to an HSA, or Health Savings Account. These tax-advantaged savings accounts can help individuals cover medical expenses if you’re enrolled in a high-deductible health plan (HDHP). Similar to other tax-free accounts, your contributions are not subject to income tax from the IRS, and the savings can help you in many ways.

But what happens to your unused HSA funds when you change jobs? You may look to combine your old HSA with your new HSA account at your current job, or you might want to move your old account to a new HSA provider.

This article will explore your two options for moving those funds: the HSA rollover and the HSA transfer, as well as their benefits.

Consolidating your HSAs

So you’ve changed jobs and are now wondering: is it worth moving your existing HSA funds to a new account? There are a number of benefits to consolidating your HSAs.

Having just one account (instead of many) can help you:

• Potentially save on account fees.
• Streamline your financial and investment management.
• Access a diversified pool of investment options.

Let’s explore the two ways you can move the funds from your old HSA: rollovers and transfers.

What are HSA rollovers?

If you choose an HSA rollover, you, as the account holder, will be an integral player in the process.

1. First, you’ll request a withdrawal from your old HSA provider, which may require selling assets. The timeline to liquidate assets depends on your account’s investment options, which may include mutual funds and/or ETFs.
2. Then, the account administrator will send a check directly to you.
3. You’ll be responsible for depositing that check into your new HSA within 60 days from the withdrawal date.

If you don’t move the money into the new HSA within that time frame, you’ll be liable for income taxes on the amount rolled over and a 20% penalty for making a non-qualified withdrawal. Make sure to keep this in mind when deciding between an HSA rollover vs. an HSA transfer.

Finally, it’s good to know that the IRS limits you to one HSA rollover once every twelve months.

Benefits of HSA rollovers

Moving your funds from your old account to your new account can help you in the long run. Read on to find out how.

Reduce fees

Having funds in multiple accounts may mean paying fees for each of them. If your new HSA provider offers lower fees, it would be wise to bring your funds over.

Similarly, if you want to find a different HSA provider specifically for the purpose of avoiding or reducing fees, that’s also not a bad idea.

Eliminate forgotten accounts

Remember that the money in your HSA is yours and continues to grow each year if you don’t need it for qualified medical expenses.

Optimizing your HSA can pay big dividends — both literally and figuratively. Try not to forget about your HSA behind when you change jobs, since it might be costly in the long run.

Expand investment options

If your current HSA provider offers a broad range of investments that better suit your financial goals than the ones offered by your old provider, initiating a rollover to combine the accounts might make sense.

More choices often means more flexibility in terms of investment management.

Drawbacks of HSA rollovers

Rolling over your HSA funds can help you optimize your financial planning. But, many of these advantages also apply to the HSA transfer option. HSA rollovers also come with significant risks relative to direct HSA transfers.

Here are some challenges to be aware of when you choose a rollover:

• When reinvesting your funds, you must meet the 60-day rule, or you’ll be penalized with both taxes and penalties.
• Rollovers may require more steps as you’ll likely have to sell assets and draft a check to make your rollover contribution. It can take more time, and there’s more room for error.
• You’re only allowed to do one HSA rollover every 12 months, so if you have numerous accounts, choosing this option could make the process take several years to complete.

Many of these drawbacks don’t apply to the HSA transfer, an option we’ll explore next. If you choose to go with the rollover, speak to a tax professional to understand the rules and any tax implications you might be facing.

What are HSA transfers?

HSA trustee-to-trustee transfers, or, more simply, HSA transfers, give you a more hands-off option to move your money. Instead of the origin HSA mailing a rollover check to you that you’ll have to forward to the destination HSA, the origin HSA will initiate a direct transfer of funds to the destination HSA.

This process can take 4-6 weeks, depending on the financial institutions involved. This is usually quicker than an HSA rollover, and there isn’t a limit to the number of HSA transfers you can make. Since the funds never enter your hands, you don’t have to worry about the potential tax or penalty risk associated with an HSA rollover.

To begin an HSA transfer process, you must submit your transfer request to your previous administrator, fill out the transfer form, and the HSA provider will execute the transfer for you.

Benefits of HSA transfers

If this option seems easier than the HSA rollover, you’re right. That’s why many account holders prefer a transfer over a rollover.

Here are some benefits you’ll see when you execute an HSA transfer

You aren’t limited to one transfer per year

Tax law doesn’t limit the number of trustee-to-trustee transfers you can execute in a single year.

You can avoid taxes and fees

Since the money doesn’t enter your hands, you won’t have to adhere to the 60-day rule or be subject to non-qualified distribution penalties and/or income tax.

Some exceptions apply when you have to sell your holdings, which we’ll review in the next section.

You still gain the investment and savings benefits of an HSA rollover

The motivation for a transfer is the same as a rollover: it all starts with an account holder seeking to consolidate and streamline their finances, reduce fees, or expand their investment options.

This is all possible with a transfer; the main difference is in the paperwork and execution, not the result.

Drawbacks of HSA transfers

If your HSA savings are invested in mutual funds or other investments, you’ll sell your holdings when you exit your old account. This can cause some lost market performance if the broader stock market were to increase when your funds are in transit.

Some accounts will allow you to make an in-kind transfer — which means moving your funds as-is without selling any investments. This is less common, so contact your provider to see if it’s an option for you.

Speak to a tax professional to ensure you fully understand the consequences of your consolidation.

Should I choose an HSA rollover or transfer?

There is no one size fits all approach to managing your finances, but there are some questions you should ask yourself before you choose which method to use:

• Are you fully aware of your rollover’s potential tax and penalty implications if you don’t meet the 60-day deadline? Are you guaranteed that you can avoid missing the 60-day deadline? If this is a concern, you may want to avoid the rollover.
• Would you prefer to avoid holding the money and have the account administrators handle the transfer? If so, perhaps consider a transfer, not a rollover.
• Do you have multiple accounts you need to consolidate? If so, the one rollover per year limit may draw out the process, and you might choose to go with a transfer.

HSA Rollover FAQs

Can you roll over an IRA to an HSA?

It is possible to roll a portion of your IRA (Individual Retirement Account) into your HSA. This is known as an IRA-to-HSA rollover.

To effect such a rollover, you must be eligible to make HSA contributions and adhere to all HSA contribution limits for the year, as this transfer will count toward that limit.

It’s critical to remember that you’re only allowed one IRA-to-HSA rollover from your retirement account once in your lifetime.

Remember, there are many types of IRAs, such as Roth IRAs, SIMPLE IRAs, traditional IRAs, and self-directed IRAs. Check to see if yours qualifies; many of these are eligible for the HSA transfer. However, some transfers will be more tax-advantaged than others.

Can you roll over an HSA to a 401(k)?

No, you cannot move HSA funds to a 401(k) or vice versa.

Do I need to report my HSA fund movement to the IRS?

You’ll need to report your transfers or rollovers using the IRS Form 8889. Speak to a tax professional to ensure you execute this correctly, especially if you’ve chosen a rollover.

The bottom line

If you’re changing jobs, it’s probably a smart idea to consider consolidating your HSA accounts to maximize your savings, avoid abandoned investments, and potentially reduce fees.

When exchanging your HSAs, you can complete an HSA rollover or an HSA transfer. A rollover means you’ll hold the money and must adhere to all rules and guidelines to avoid penalty fees. With a transfer, the plan administrator moves the money directly, making it a more accessible option in most cases.

Keeping track of your investments and savings is essential to build a solid financial future. Capitalize is here to help manage the process of rolling over retirement accounts and serve as your trusted partner in the process.

Find out how we can help you consolidate your investments and savings today.