@HSAQuestion1 wrote:
Hi @Opus 17 - I am seeing mixed answers regarding a similar situation for me (or maybe I just misunderstood).
I interpreted that the earnings on 2023 excess contributions that were not removed by April 2024, but instead December 2024, are not taxable in 2024 and essentially become tax-free. The logic being this:
Form 5329, Line 42 - Excess from 2023: $3,850
I only need $3,850 on Line 44 (2024 distributions) to eliminate this prior year excess, which comes from Line 16 of Form 8889, Taxable HSA Distributions. But if my total distribution was $4,098 on Line 14a, I can state $248 of qualified medical expenses on Line 15 to not have to pay tax & penalty on the $248. I assumed this $248 would wind up somewhere else on the return to be taxed. Is this not the case?
*If you have a taxable distribution (not used for medical care) it is subject to income tax plus a 20% penalty, you do not want to go that route.
No, you are misunderstanding about the 6% penalty. If you have excess contributions in 2023, and you do not remove them, you will pay 6% every year for the rest of your life or until the HSA balance is spent down to zero.
You can't remove the 2023 excess contribution by any special procedure. Instead you have 2 ways to remove it.
A. Withdraw it as a regular contribution not for medical expenses, and pay income tax plus a 20% penalty.
B. "Remove" the 2023 excess by considering it part of your 2024 limit.
To remove the 2023 excess of $1035 by considering it part of your 2024 limit, you can only contribute an additional $3115 for 2024. If you contribute more than $3115, you now have an excess for 2024, not an excess for 2023. If you do the removal of excess procedure, you are removing excess from 2024 (so you can "make room" under the cap to use up the 2023 excess). Since this is a removal of excess 2024 contribution carried out in 2025, the earnings are taxable in 2024, if there are any earnings. Maybe there are not.
