HSAs (or Health Savings Accounts) are a great tax benefit for people with eligible high deductible health plans. But as you go from job to job, you can end up with HSAs littered across several different HSA providers or administrators. And at some point, you may want to do an HSA rollover.

There is a way to clean up all of these accounts and consolidate them into one account. However, there are rules you need to know, and you need to understand how the taxes may be handled.

This article will explore how to do that and when you might want to use an HSA rollover.

Related: If you're looking for a place to rollover your HSA, check out our list of the best HSA providers.

Transfer Your HSA

When you have multiple HSAs, paying for medical expenses can become cumbersome. At some point, you end with not enough money in one account and have to use another just to pay for one bill. A better solution is to consolidate all of these accounts into one. This allows you to then use just one debit card to pay for medical expenses. Consolidating can also cut down on administration fees.

To move money from one HSA account to another, you can do a transfer. This is a direct custodian-to-custodian movement of funds (also called trustee-to-trustee). With an HSA transfer, you don’t ever come in contact with the funds while they are being transferred. That’s important since taking possession of funds can invalidate the process and trigger tax consequences.

To complete an HSA transfer, you must be the owner of both HSA accounts. Call up your HSA administrator of the account you want to transfer and ask how to get started. Once the transfer starts, all of you have to do is wait for it to complete. Once completed, you probably will need to call the HSA administrator again (that you transferred funds from) and ask them to close the account.

An HSA transfer can be done as many times as you like — there’s no limit. These transfers will also not impact your annual HSA contributions or income. Additionally, there’s no tax reporting involved with an HSA transfer.

For example, if you want to use Fidelity as your new HSA provider, you can do this whole process at Fidelity and never have to speak to your old company (except if you want to close the account).

Note: It can take 2-6 weeks to process a transfer and it's been our experience that pretty much every "old school" HSA provider is terrible about the process in terms of ease of use and timing.

In-Kind Investment Transfer

With this type of transfer, you’re transferring investment holdings (i.e., stocks, bonds, mutual funds) to another HSA account. The positions are transferred with their cost basis retained (in most cases). This keeps you from having to liquidate positions just for a transfer.

However, not all HSA administrators allow this. In that case, you will need to liquidate your holdings. Liquidations may trigger tax consequences in some states. You’ll want to work with your HSA administrator and tax advisor before initiating this type of transfer.

Note: Some administrators (especially at larger companies) offer very special or specific funds that aren't offered elsewhere. These will never likely transfer in-kind.

HSA Rollover

An HSA rollover is different from a transfer. The most important difference is that you can only do one HSA rollover per year.

With an HSA rollover, your provider sends you a check, which must then deposit into your other HSA account. You have 60 days from withdrawal to deposit to complete the process. Otherwise, you’ll be taxed on the withdrawn amount and hit with a 20% penalty. After 60 days, the withdrawn amount is considered a distribution, which is why it is taxed.

Rollovers don't count against your annual contribution. However, they must be reported on your tax return. A rollover is riskier than a simple transfer since it is less automated and has a higher cost if you don't follow the instructions. You'll have to wait 12 months from the date of the last rollover before you can initiate another one.

IRA To HSA Rollover

There is another type of HSA rollover that involves retirement accounts. You can rollover funds from your Traditional IRA or Roth IRA into your HSA account. This can only be done once in a person’s lifetime.

An IRA to HSA rollover will impact your contributions. Your annual HSA contribution limit will be reduced by the amount of the IRA to HSA rollover.

Funds in an IRA are tax-deferred. Once they are rolled into an HSA, they become tax-free. A SEP and Simple IRA can also utilize this strategy as long as the IRA is no longer considered "ongoing" by the IRS.

If you are going this route, you’ll certainly want to work with your HSA administrator.

Instead of doing an IRA to HSA rollover, you might want to consider just contributing to your HSA. The contributions have tax benefits and you don’t reduce your retirement account, which is money you can never get back.

Tax Consequences Of An HSA Rollover

For 48 states, there are no tax consequences for for an HSA rollover.

There are currently two states (California and New Jersey) that don't conform to Federal law when it comes to HSAs. There are currently bills in progress, but as of now, an HSA is basically treated like a taxable brokerage account in these states.

For example, you don't get to deduct your HSA contribution for state income-tax purposes, and you should be reporting your capital gains and dividends on your state income tax return as well.

When it comes to rollovers, a transfer of custodians is not a taxable event (although your underlying HSA may have its normal taxable events). However, a rollover that you're required to report is a taxable event, and you will pay taxes on any gains as part of the rollover.

As such, California and New Jersey residents are encouraged to only do an HSA transfer.

Conclusion

Getting money into an HSA account can be done in a few ways:

• New Money (up to the HSA contribution limits)
• Transfer Funds
• Rollover
• IRA to HSA Rollover

Each method is used for a specific reason, and some come with restrictions. The simplest ways to get money into an HSA account are direct contributions and transfers. Rollovers are more involved, and rules must be carefully followed to avoid taxes and penalties.

It's highly encouraged you speak to a tax professional about your rollover and ensuring that you report it correctly on your tax return.