Do you pay taxes on HSA withdrawals after 65? (2024)

Do you pay taxes on HSA withdrawals after 65?

At age 65, you can take penalty-free distributions from the HSA for any reason. However, in order to be both tax-free and penalty-free the distribution must be for a qualified medical expense. Withdrawals made for other purposes will be subject to ordinary income taxes.

Are HSA withdrawals tax-free after 65?

Can my HSA be used for anything other than qualified health care expenses? One benefit of the HSA is that after you turn age 65, you can withdraw money from your HSA for any reason without incurring a tax penalty. You are, however, subject to normal income tax on any non-qualified withdrawals.

How much tax do I pay on my HSA withdrawal?

Any HSA withdrawal you make without a qualified medical expense will be subject to income taxes. In addition to the income tax, you'll have to pay an additional 20% tax on the withdrawal. The taxes you pay on an unqualified HSA withdrawal will add up quickly.

How do I avoid tax on my HSA distributions?

An HSA distribution—money spent from your HSA account—is nontaxable as long as it's used to pay for qualified medical expenses. HSA distributions used for anything other than qualified medical expenses are not only taxable, they're subject to an additional 20% penalty if you're not disabled or are under the age of 65.

How do you answer HSA questions on taxes?

The HSA contributions that you make directly to your HSA (outside of your employer's payroll system) are reported on Line 2. If your HSA contributions are deducted from your paycheck and/or your employer contributes on your behalf, those contributions should be listed on Line 9 instead.

When can you withdraw from HSA tax-free?

After age 65, you can use your HSA withdrawal for non-medical expenses without paying the 20% tax penalty.

Why is my HSA distribution being taxed?

Non-qualified HSA distributions: These are distributions from your HSA used for any purpose other than paying eligible medical expenses. The distribution will be taxed as ordinary income and, if you are not yet 65 years old, you will generally also pay an additional 20% tax penalty to the IRS.

Do I have to report HSA withdrawals on my tax return?

HSA distributions are reported to the account owner on Form 1099-SA. This form is issued by the financial institution. Form 8889 must be filed with your annual Form 1040 federal tax filing if you make contributions to or take distributions from an HSA.

Does IRS look at HSA withdrawals?

Verification of expenses is not required for HSAs. However, total withdrawals from your HSA are reported to the IRS on Form 1099-SA.

What triggers an HSA audit?

Does HSA spending trigger an audit? The IRS doesn't monitor how you spend your HSA funds throughout the year, but that doesn't mean they won't ask for proof that your expenses were eligible. And if your tax return contains unrelated IRS audit red flags, your risk for an HSA audit could increase.

What is the HSA reimbursem*nt loophole?

Keep in mind that you can reimburse yourself for any expense at any point, as long as it was incurred after your HSA was established. So if you had an expense that you paid out-of-pocket last year after your HSA was established, but want to reimburse yourself for it this year, you can do so without penalty.

What is the downside of an HSA?

The main downside of an HSA is that you must have a high-deductible health insurance plan to get one.

What is the 12 month rule for HSA?

The last-month rule comes with an important catch, though. You must stay enrolled in an HSA-eligible health plan for a one-year "testing period" running from December 1 of the year you contribute to December 31 of the next year.

How does IRS track HSA?

Taxpayers are not required to take annual distributions from their HSA. However, taxpayers who have taken HSA distributions will receive Form 1099-SA, Distributions from an HSA, Archer MSA, or Medicare Advantage MSA, from their HSA trustee and must provide it before the return can be completed.

Why is TurboTax telling me to withdraw from my HSA?

If you exceed the contribution limit, you must withdraw the excess before you file your tax return or you'll be penalized. It's a good idea to double-check the HSA information you entered in TurboTax to make sure you really had an excess contribution.

How do I withdraw cash from my HSA without penalty?

You can take money out any time tax-free and without penalty as long as it is used to pay for qualified medical expenses. If you take money out for other purposes, however, you will pay income taxes on the withdrawal plus a 20% tax penalty.

Can I withdraw money from HSA for personal use?

If you take an HSA withdrawal for non-medical reasons and you're not yet 65, you'll be taxed on the money you remove from your account. You'll also face a 20% penalty on the sum you remove. Ouch. That's double the penalty for taking an early IRA or 401(k) plan withdrawal.

Does HSA affect taxable income?

A health savings account is a tax-advantaged way to save money. HSA contributions reduce taxable income, investment growth in the account is tax-free, and qualified withdrawals are tax-free. Money left over at the end of the year in an HSA is not forfeited and can be rolled over from year to year.

Do HSA withdrawals get audited?

When using an HSA debit card, retain receipts for each transaction as those expenses will be reported to the IRS, and you could be audited.

How common is HSA audit?

IRS audits on HSA reimbursem*nts, especially when it comes to multiple years of reimbursem*nt, aren't uncommon. And if you can't provide detailed records, you'll be faced with paying income tax on all the expenses plus a 20% IRS penalty. Luckily, with a Bend HSA, keeping track of your HSA-eligible expenses is easy.

How far back does IRS audit go?

How far back can the IRS go to audit my return? Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don't go back more than the last six years.

What happens if I use my HSA card for groceries?

If you spend your HSA funds on unqualified expenses, whether intentionally or by accident, the transaction will go through, and you'll have to pay income tax on the amount.

What is the best way to save HSA receipts?

Create digital and physical file folders

That way, you still have HSA records in case your computer goes on the fritz, or your cat decides to use your file folders to sharpen their nails. Creating folders, digital and physical is really crucial to keep your HSA documents organized.

How much should I have in my HSA at retirement?

According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2023 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement. An average individual may need $157,500 saved (after tax) to cover health care expenses in retirement.

What happens to unused HSA funds at retirement?

Once you reach age 65, money held in an HSA can be withdrawn and used for any reason, the only catch being that you'll pay ordinary income taxes on withdrawals not used for qualified medical expenses.