Using TSP to Fund HSA?
There’s been a law on the books for 20 years that most people don’t know much about, but I still get questions every week on it. That’s unusual. Normally anything that’s been around that long has either been digested, analyzed, and passed around until everyone knows it in and out. Or the other extreme happens: No one ever asks anything at all about it because it never really landed on anyone’s radar. One of the two. This one is different.
But, it’s different like most other aspects of HSAs. For some reason this awesome account still seems unclear to many people.
The “Health Opportunity Patient Empowerment Act of 2006”, later codified into federal law as Public Law 109-432 “Tax Relief and Health Care Act of 2006” altered Section 408 (d) (9) of the Internal Revenue Code to allow a once in a lifetime transfer from a retirement account to a Health Savings Account. For some reason, people think this is a big deal. I’m going to show you why it’s not. And how you can do it as many times as you want.
Let’s make sure we know what we’re talking about first. In order to do this, you need to have a couple of things already: A Traditional IRA and a Health Savings Account (HSA). In order to contribute to a Health Savings Account, you must have a High Deductible Health Insurance Plan (HDHP). So I guess, that’s really step number one. And they do exist in FEHB. For example, I have the GEHA HDHP Self+Family, Code 342. That HDHP makes me now eligible to contribute to an HSA. You can’t just set up an HSA if you don’t have a High Deductible Health Plan. It’s not an FSA that’s simply available to all of the mere commoners. An HSA is an elite account, triple-taxed advantaged by the way, only available for those with an HDHP (pinkies out).
So, assuming:
You have a HDHP
You have an HSA
You have a Traditional IRA
You remain eligible for the 12 months following the contribution we’re going to talk about (like you keep your HDHP for the next year.)
Then….
You can roll over money directly from your IRA to your HSA. No taxes generated. You’re just transferring some IRA money into the HSA. There are a few things to consider:
You cannot exceed the contribution limit for that year. And this includes the amount the insurance company puts in. For example, in 2026, the family contribution for someone under 55 is $8,750. However, my insurance company (GEHA) contributes $2,000 to my HSA before I contribute anything. Which means the most I can contribute to my HSA, whether directly or combined with a rollover is $6,750 ($8,750 - $2,000). Some people forget that part. The overall contribution limit of $8,750 is for what THEY put in and what YOU put in.
This is a once in a lifetime transfer. Congress is specific about this. See 26 USC 408(d)(9)(C)(ii) People ask why have a rule like this. I have zero clue. It’s unusual to have something only available once in a lifetime. And it’s not like it’s millions of dollars or anything. We are talking less than $10k. So it is not life altering in any way, shape, or form. And there is an easy workaround (stay tuned). Someone in Congress apparently had a reason somewhere. And it’s lost to history as far as I know.
It should be a direct, trustee to trustee transfer. So from the IRA directly to the HSA.
The transfer is not tax-deductible since you already got a tax deduction when you contributed the money to your 401k or IRA.
You should talk to someone at your IRA to discuss this.
A TSP to HSA Transfer
I can find no mention of anything related to an HSA on the TSP website. I can find no bulletin or other literature that mentions this transfer. I can find nothing in IRS Pub 721 about this. Searching HSA returns no results on TSP. Unless someone knows otherwise, it does not seem possible to transfer directly from TSP to an HSA.
No worries, though. There’s almost always a way around something. It’s just an extra step if you want this done. You rollover money from your Traditional TSP to your Traditional IRA. And then you perform the rollover to the HSA. Extra hoop to jump through, but nothing big. Just one quick stop for the money enroute to your HSA. In order to roll money out of TSP, you typically need to be separated from the government or over 59 1/2. So just keep that in mind.
Why do This? What is the Point?
Well, some people may want to get a jump start on funding their HSA if they came to it later in life and want to build it up quicker. Some may want to avoid RMDs out of their Traditional TSP so transferring money to HSA means less RMDs. (There are no RMDs from an HSA). This might help, but it would be a miniscule amount, certainly not anything to create a significant difference in RMDs over a person’s lifetime. Basically, people just hear about it, realize it’s a novelty (“You can only do it once so it must be extra special or something! I better take advantage of it!”)
Is There Another Way to Accomplish the Same Thing?
Why, I’m so glad you asked. Yes. There is a very simple method for funding your HSA with your TSP.
Lean in close and get a load of this: You take money out of your TSP…..and then….. you put it in your HSA.
Whoa. Mind blown. Shhhh. Don’t let it get around.
You can do this as many times in your lifetime you want. As long as you don’t go over the annual contribution limit. Makes the above law seem pointless to me.
Let me explain since I can already hear the arguments.
You take $6,000 out of your TSP in the form of a withdrawal. That increases your taxable income by $6,000 for the year. You take $6,000 and then you deposit that $6,000 in your HSA. That decreases your taxable income by $6,000 for the year.
Net effect: $0 additional taxes. If your taxable income for the year was $100,000 before you withdrew the TSP money, after you put the money in your HSA, your taxable income for the year is still $100,000.
Now, there is the pesky little item of withholding. TSP will withhold 20% of your withdrawal. On a $6,000 withdrawal, they will withhold $1,200. You’ll receive $4,800 in your bank account. So when you put the entire $6,000 into your HSA, you’ll have to find an additional $1,200 from your savings account to go with the $4,800 the TSP sent you to replace all $6,000. Then, when you file your tax return, you’ll get that $1,200 back from the IRS that you can then put back in your savings account.
$6,000 came from TSP.
$6,000 went into HSA.
All is right with the world.
Don’t get all worked up; everything’s fine.
A caveat for those of you on Medicare. Remember once you are on Medicare, you can no longer contribute to an HSA. Probably not what you want to do at that point anyway—in all likelihood you’re using your HSA to pay for Medicare. But regardless, just remember that signing up for Medicare ends the HSA contribution eligibility.
While the above may or may not be groundbreaking, the following is pretty cool….
An Alternative HSA Funding Strategy For Kids
Here’s a good one that my financial planner in the making, Conner, dug up today.
Children over 18 but under 26 may each be able to contribute up to the family plan max of $8,750 in their own HSA.
Here’s how that works:
Child is on a parent or guardians HDHP/HSA eligible plan
Child is not claimed as a dependent for tax purposes on their parent’s return
Child is not covered by Medicare or any other plan
Child contributes $8,750 to their own HSA even when parents are maxing out theirs