Regarding "The law lets you withdraw excess contributions up until the due date of the return (as extended). If you just carried over the excess to the next year, then withdrew the excess the following year by that year's due date, that would defeat the clear intent of the law - this is why you can't withdraw 2019's excess in 2021."
If I have already paid taxes on the excess (as it was reported as other income on my 2019 tax return) and paid the 6% penalty, it seems that I would be sufficiently penalized for keeping the excess from 2019 in my HSA. In this case, I'm not sure what the intent of the law is.
I have already maxed out my contributions for both 2020 and 2021. Below is what I think the source of my confusion may be:
I'm inclined to think the following would make me whole:
1) I take a distribution of excess contributions in the amount of $X from my 2020 HSA
2) I pay the 6% excise tax when filing my 2020 taxes since as you've said, the 2019 excess is still in there.
3) Post 2020 tax season, I receive a type 2 1099-SA for the distribution of excess contributions I took for 2020.
4) When I file my 2021 taxes, it sees the excess from 2019, but I also enter the 1099-SA and it makes me whole. I may or may not have to pay the 6% excise tax once more, but I should be cleared up for tax season 2022.
From what you've said, it sounds like the above is not correct, and instead this is what will occur:
Excess from 2019 rolls over and essentially becomes a reduction in the amount I am able to contribute in 2020. However, since I have maxed out my HSA for 2020 already, withdrawing the excess from 2020 does me no good. The only way this would have worked (i.e. made things right) is if I had not maxed out my 2020 contributions in the first place, since it shows up on my W2. Since I have maxed out my HSA in 2021, the same will occur; I can't withdraw the excess from 2019 in 2021--I should have contributed in 2021 only to the amount of $MAX_2021 - $X, where MAX_2021 = the max HSA contribution for 2021 and X = excess from 2019. So, the way to clean this up is to not withdraw excess from 2020 or 2021, but in 2022, to ensure that I only contribute $MAX_2022 - $X, where MAX_2022 = the max HSA contribution for 2022.
Am I understanding this correctly?
Key things to note:
- I have maxed out my HSA contributions for 2020 and 2021.
- I correctly reported my 2019 excess contribution when filing my 2019 taxes. I paid the 6% excise tax and income tax as the excess was counted as other income.
- I have not invested any of the HSA contributions.
- The reason it was an excess in 2019 is that I was a dependent on my mother's tax return in 2019.
At this point, I'm wondering if option 2 might be better. Will I be paying both the 6% excise tax AND income tax (if the excess is reported as "other income") for 2020 and 2021 if I do option 1?
Thank you for all of your help!
