The IRS allows you to convert an IRA to an HSA, but there's a catch, you can only do it once, so choose wisely.
You must have a High Deductible Health Plan (HDHP) and keep it for 12 months after the conversion. You can only convert an amount equivalent to your annual contribution ($3350 single, $6750 family) minus what you've already contributed for the year. You must do it during the calendar year (whereas regular HSA contributions can be made up until April 15 of the next year.) You can also convert a Roth IRA to an HSA, but that's kind of dumb for obvious reasons, although you would avoid the 10% withdrawal penalty if you spent it on health care prior to age 59 1/2.
Enabling a Backdoor Roth IRA
One great use of this one-time conversion is to get rid of a traditional IRA when you don't have a 401(k) to roll it into. Say you have a $6K IRA, are an employee without access to a 401(k) or 403(b), and want to do a backdoor Roth, but you don't want to pay 30-40% in taxes to convert the traditional IRA to a Roth IRA. You can convert that $6K IRA to an HSA, no tax due! A more common scenario is with a spousal traditional IRA when the spouse is no longer working. You want to do a spousal backdoor Roth, but he/she has this pesky IRA left over from previous employment. Now you can toss it into the HSA and start doing backdoor Roths. Even if your IRA is larger, say $13K, well at least the tax bill is cut in half. Obviously this isn't going to help you much if you're trying to get rid of a $150K IRA.
A Big Fat Health Care Bill
Another solid use is when you have a big health care bill that is eligible to be paid with an HSA, especially when you're retired (but still using a HDHP) and would be withdrawing from that IRA to pay it anyway. You convert IRA money to HSA money, pay off the health care bill, and save the taxes due on the IRA withdrawal.
Lowering Required Minimum Distributions
IRAs have RMDs. HSAs do not. So if you'd rather take a smaller RMD, put some of that IRA money into an HSA. You'll definitely be better off if you spend the money on health care eventually, but possibly will be better off even if you don't since after Age 65, an HSA functions just like an IRA without RMDs.
No Stretch HSAs
In summary, the uses of this technique are pretty limited due to the limitation on how much you can convert (just $3350/6650), but if you're one of those for whom it makes sense, go for it!
What do you think? Have you used IRA money to fund your HSA? Why or why not? Comment below!