Take a once-in-a-lifetime distribution tax-free from your traditional IRA. Maximize your tax savings.The Tax Code is riddled with esoteric deductions even many tax professionals are unaware of. So rare is the topic of today’s discussion that I never once in my career had a client use what I am about to point out.

Before you get too excited, know that just because you can do something doesn’t mean you should. Only under a unique set of circumstances would using this tax strategy be beneficial so read carefully. You only get one shot at this strategy because it is only allowed once in your lifetime. 

It’s called a Qualified HSA Funding Distribution (QHFD). In short, a QHFD allows you to fund your HSA with pre-tax monies in a traditional or Roth IRA or inactive SEPs and SIMPLEs. 

Let’s dig into the details before we discuss when it is appropriate to use your once-in-a-lifetime election and when it isn’t. 



  1. You must still qualify for an HSA contribution when using an QHFD. This means you must have an HSA qualified health insurance plan with applicable high deductibles.
  2. You must remain eligible for an HSA for 12 months or longer after making a QHFD. If you are not HSA compliant for at least 12 months after the QHFD you must include the distribution in  your income along with any penalty if under age 59 1/2.
  3. You must use a trustee-to-trustee transfer. You are not allowed to take the money out and then put it in the HSA. (Well, actually, you can, but the IRA distribution would be included in income — along with penalties if under age 59 1/2. But you would get the HSA deduction, offsetting the IRA distribution included in income.)
  4. A QHFD does not increase the amount you can put in an HSA for that year. Contribution limits still apply.
  5. You also do not get an HSA deduction for funds transferred from an IRA; the money is already pre-tax.
  6. An inherited IRA can be used for a QHFD.
  7. The QHFD lowers your RMD by the amount transferred for the year of the transfer.
  8. There is no 10% early distribution penalty with a QHFD as long as you follow the 12 month rule and qualify for an HSA.
  9. This strategy can only be used once-in-a-lifetime per taxpayer.


Why Would Anyone Do This?

Learn how to use your once-in-a-lifetime tax election to transfer money tax-free from a traditional IRA to an HSA.When you think about this for awhile it might seem a counter-productive tax move. (We will discuss instances where the QHFD is advantageous later.) You are not allowed a larger contribution to the HSA with this strategy and you get no additional deduction either.

Roth IRAs are a non-starter. rIRAs are already growing tax-free so moving money from a rIRA to an HSA provides no additional advantage with the added restrictions, such as the 12 month requirement listed above and a QHFD is limited to pre-tax dollars.

SEPs and SIMPLEs must be inactive to employ this strategy. This means contributions are no longer added to the account. The IRS is silent on how long an account must go without contributions to be considered inactive or if the SEP or SIMPLE can become active in the future.

There are a number of situations where the QHFD is superior to just funding the HSA and getting an additional deduction:

  1. You don’t have the money to fully fund your HSA this year. Since you would not fund your HSA anyway you end up with additional cash in the HSA that now grows tax-free instead of tax-deferred (I assume throughout this post that you use a QHFD from a tIRA to an HSA.) 
  2. If your tIRA is large and significant RMDs loom, any tax-free distribution from the tIRA is advantageous. It also lowers the RMD by the amount of the QHFD for that year.
  3. This strategy is better than taking an IRA distribution and paying the penalty (if under age 59 1/2) and then contributing to the HSA.
  4. You want (or your facts and circumstances dictate) to turn tax-deferred growth into tax-free growth. Remember, a tIRA grows without tax until withdrawn; an HSA grows tax-deferred and if used for qualified medical expenses and/or Medicare premiums the money comes out tax-free at any age.
  5. High medical bills make it difficult to fund the HSA and access to HSA funds are needed for uncovered medical expenses.

There are other reasons to use a QHFD, based on facts and circumstances and personal preference. Personally, I think people with large IRAs might want to employ this tax strategy and these that lower their future RMDs


Gaming the System

For 2019 you can contribute $3,500 for individual health plans and $7,000 for family plans into an HSA. (Those 55 and older can add another $1,000 to their HSA as part of the catch-up provision.)

There is a little-known tax strategy that allows you to transfer money from your traditional IRA to an HSA tax-free and penalty-free. Learn how this tax strategy affects you.In The Wealthy Accountant private group on Facebook a member asked about this tax strategy. Since the issue never arose in my office I wanted to dig a bit before answering and then couldn’t find the original post on Facebook (fingers crossed the person who asked finds this post.)

His question was about gaming the QHFD to double the tax benefit by transferring two years of contributions by making the contribution in the cross-over months (up to April 15th of the following year without consideration for extensions). He wanted to know if he could make, say, a $14,000 family plan contribution: half for last year and half for this year.

He did his research and found the IRS and all other sources silent on the issue. I found the same thing.

However, after I thought about it for awhile I realized this would NOT work. The once-in-a-lifetime QHFD would have to go on two tax returns if you doubled the transfer during the cross-over months which would make the second election disqualified. Sorry. But I like the way you think.


Round Up

The concept is rather simple. The benefits are fairly small, but worth it if your situation dictates. Those facing large RMDs and those seeking to turn a small portion of their tax-deferred tIRA into tax-free growth in an HSA will find the most value.

Now I need to make a confession. When I first saw the question in the private Facebook group I thought the person posting was smoking something. I never heard of such a tax strategy (or it went in this ear and out the other.) I had to look it up to believe.

If you plan on using this strategy don’t get mad at your tax professional if they never heard of this. Just tell them to go to their software’s Special Situations tab on the 1099-R screen. All they need to do is add one simple number (the amount transferred to the HSA up to the contribution limit).

If you run across a tax strategy you never heard of before be sure to leave a comment. If possible I will leave a short answer. And, as in this situation, I may flesh it out a bit more in a post. 

Many of these strategies provide only a small tax benefit. Added together with several other small tax strategies can accumulate to serious tax savings. 

Hope this one works for you or at least gets you thinking about another tax saving strategy that improves your financial situation.


More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Even if you read the news poorly you know healthcare costs in the U.S. are astronomical. The U.S. healthcare system is more than double the cost of the world’s second costliest health care system in the U.K. And what do we get for all this extra money we pay for healthcare? Subpar performance. The U.S. currently ranks 37 according to the World Health Organization, right behind Costa Rica and ahead of Slovenia. Pathetic.

Medical issues are the one area of life that can destroy early retirement plans or any illusion of financial independence. To make it worse, health insurance is now required in the United States and it isn’t cheap. For American citizens, you are forced to participate in this inadequate health care system by financially supporting it to your maximum potential.

To add salt to the wound, many medical procedures are not covered. Weight-loss programs, cosmetic surgery, teeth whitening and hair transplants are not deductible expenses on U.S. tax returns, nor is it covered by most insurance. If your insurance does not pay for it, it comes out of your pocket. Many deductible medical expenses are not routinely covered by insurance. Eyeglasses and Lasik surgery come to mind.

Better Health Care, Lower Cost

Where you live determines if you live! Saving money on medical care is worthless if you don’t get to live to enjoy it. Which brings up a good point. Since medical costs are so high in the U.S., you probably don’t mind the higher mortality rates. Reduces the pain and suffering of living.

This Wikipedia entry lists survival rates by country for certain cancers, strokes, and heart attack. The United States is #7 for heart attack and #4 for ischemic stroke. The U.S. ranks lower for all other illnesses and diseases.

The real difference is in cost. Bypass surgery costs well into the six figures in the U.S. while the same procedure can be up to 90% less in countries with high or higher survival rates. Lasik surgery for both eyes averages $4,400 in the U.S. and $500 in India.

Many American doctors come from other countries. They study in the U.S. and get their medical degree in the U.S. Some of these doctors return home to practice. High quality healthcare is found in surprising places.

The cost of travel increases the cost of medical treatment in another country. Many simple procedures, while lower in cost abroad, will not save you money after factoring in travel expenses.

Many insurance policies don’t cover medical treatment outside the U.S. However, with the growth in high-deductible insurance plans and a long list of uncovered procedures, medical tourism is a great opportunity to increase the quality of your medical care while reducing your out-of-pocket costs, including travel expenses.

You can research international medical costs easily before making a decision with this link.

Still Getting a Deduction

Most Americans are sold on the high quality, affordable medical services provided outside the United States. The questions I hear most often in my office revolve around taxes and deductions. I have good news for you. Most of the medical costs for out-of-country medical care are deductible, including travel. There are several issues to consider, however. Your personal insurance and medical situation will determine how valuable that deduction is.

Let’s start with a common situation where you have insurance with good coverage. If your insurance is footing the bill, it doesn’t make sense to travel to another country for medical work with two exceptions. First, quality is more important than price. The low ranking of service in the U.S. for many medical procedures might cause you to consider a healthcare system elsewhere for your needs. Living is more important than insurance coverage. Second, Even the best insurance does not cover all medical procedures. Even with insurance you can face a medical bill on your own. When this happens it is time to see if there are better and more affordable alternatives.

More common is the high-deductible health insurance plan. Insurance coverage is not enough. You need to meet the deductible before the insurance begins paying the bills and even then you might have co-pays. It is important to review all options before committing to a medical facility or doctor. Better and more affordable options might be available.

The uninsured should always consider alternative medical care options. With the exception of low cost procedures and medications, it is almost always more affordable outside the U.S. Travel does add to the cost, but with the U.S. so much more expensive in nearly all medical arenas, there are significant advantages to traveling for medical care.

So what is deductible on the tax return? As with most things in taxes, it depends. First, you need to itemize to deduct medical expenses. Then your medical expenses need to exceed 10% of your adjusted gross income. Example: if your AGI is $100,000 the first $10,000 of qualified medical expenses does not count. Anything over $10,000 will be added to your itemized deductions and if your total itemized deductions exceed the standard deduction you have a tax benefit. I know. Nothing is easy when it comes to taxes.

Many medical expenses not covered by insurance are a deductible expense on Schedule A as an itemized deduction. Travel and lodging, eyeglasses, and dental are qualified medical expenses, yet not covered by most insurance.

Then there are Health Savings Accounts. Attached to many high deductible plans is a tax advantaged savings account. Money contributed to an HSA is deductible whether you use it for current medical bills or not. The account remains invested, growing tax free, until you need the funds for a qualified medical expense. Generally, a qualified medical expense for an HSA is the same as qualified medical expenses for itemizing. Withdrawals from an HSA not used for medical expenses are subject to tax at ordinary rates, plus a 20% penalty prior to Medicare eligibility.

Travel expenses primarily for, and essential to, medical care are includable medical expenses as a deduction on Schedule A or for distribution from an HSA. This includes airfare to a foreign country. Meals are generally not a qualified medical expense unless it is while you are under the care of the medical facility. Lodging is also deductible at $50 per day for the person receiving medical treatment and for a person traveling with the person receiving medical care. Example: A parent traveling with a sick child is eligible for $100 per day for lodging.

Wealth Building

Where expenses are high the opportunity for significant wealth building exists. Since medical care is better abroad for most procedures for Americans, it makes sense to consider these additional options.

In my tax practice I give my employees an option. I provide a set amount each employee can use for health care. A health insurance professional is brought in to review the options with employees. They can choose what is best for them. If they want cash, they have a larger paycheck, but no insurance. (This only works for small businesses. Employer penalties apply once the business reaches 50 full-time equivalent employees.) They can also choose an HSA qualified plan and withhold contributions for their HSA from their paycheck. (Always allow your employer to make the HSA contribution for you if possible.) If my employee has not used up the allotment I set for her I pay the remaining portion to the HSA; the employee is responsible for the remainder. Check with your HR department to review your health insurance options. There could be gold in that visit.

Money in an HSA keeps growing tax-free for future medical bills. As age takes hold, the extra funds are a valuable extra in retirement. The numbers are compelling. A study by the Employee Benefit Research Institute showed an HSA could grow to $1.1 million in 40 year, assuming a 7.5% rate of return. It is clear medicine is an integral part of the wealth building process.

My dentist recently informed me I have a cavity on a back tooth. Cost to repair: $1,800! Insane, I thought. So I checked around. Guess what? By the time a new dentist goes through their medical theatrics there are few cheaper options available locally. I will plan my next international travel accordingly. The travel expense may not count as a deduction if the trip is not primarily for the medical procedure, but the dental repair is deductible. Therefore, the dental work can be paid for from my HSA.

This is an important consideration. The less I pay for better quality healthcare, the larger my HSA grows. I wish I would have considered the alternatives when I had Lasik done. I would have saved a fortune and enjoyed a free trip, speaking from a tax standpoint.

Everyone has at least a few uninsured areas of medical care. Finding high quality healthcare is possible for Americans if they are willing to travel. Americans who do have a better chance of living longer and money to enjoy it.