@glesieutre wrote:
@Opus 17 Thanks, this is very helpful. This discussions spurred me to look at the instructions for Form 5329. For line 47, they say:
In addition to regular income tax for 2023, I suppose I still have to pay the 6% excise tax (because I already filed timely without extension). But it sounds like I otherwise wipe the slate clean going forward and avoid the additional 20% tax for a non-qualified distribution.
Is that correct?
I think the wording could be more clear. Where it says "If you timely filed your return without withdrawing the excess contributions, you can still make the withdrawal no later than 6 months after the due date of your tax return, excluding extensions."
What that means is that you can make the correction up to 6 months after your deadline, whatever that was. If your deadline was April 15 and you filed on time, you have until October 15 to make the correction. If you did get the extension to October 15 and you filed on time, you would have until April 15 of the next year to make the correct. The actual code section is here. https://www.law.cornell.edu/cfr/text/26/301.9100-2
(This is actually something I have misunderstood for a long time, apparently, so I apologize for not including this option in my earlier answers.)
Therefore,
You have until October 15 to contact the HSA bank and remove any contributions over $7291. You must also remove any earnings attributable to the excess contribution (the HSA bank should know how to do this). A "return of excess contribution" is not a regular withdrawal and will probably have a special form or procedure. Don't make a regular withdrawal by accident.
Prepare an amended return. Change your answers in the HSA interview to reflect that you stopped your HSA in November 2023. Turbotax will tell you that you have an excess contribution and will ask if you will remove it before the deadline. Say yes. Turbotax will automatically add back the excess contribution to your taxable income (since it is no longer tax-deductible). Add the attributed earnings as "other taxable income." Your tax return will show the net amount of contributions on form 8889 as if you had never over-contributed, and you will not have a form 5329, and will not pay a penalty. Print your amended return and mail it to the IRS. Write "Filed pursuant to..." on the top of the first page, and include a brief explanation of the reason for the amendment on form 1040-X.
Then going forward, you have no excess issues to deal with.
If that's not correct, can any future medically-qualified distributions from the HSA be counted first against the excess contributions? (So that the 6% excise tax goes away, even though the HSA still has remaining funds.)
If you leave the uncorrected excess in the account, it is treated as the last out, not the first out, unless you withdraw it not for medical expenses and pay the 20%/
