IRA to HSA Transfer Additional 6% Tax Bug?

[kagiyama]

My wife took advantage of the once-in-a-lifetime transfer from a traditional IRA to her HSA in January of 2025. She transferred the maximum allowable amount $9550 ($8550 family plan max +$1000 due to age).  She made no other contributions and was not employed.  Due to my age, I was able to contribute $1000 separately to my HSA.  Her transfer was done trustee to trustee.  She and I were both covered by a family HDHP the entire year.  Using the step-by-step process, Turbotax 2025, correctly calculated and populated forms (8889 & 1040) characterizing the transfer as non-taxable.

However, Turbotax also generated form 5329 and calculated that the entire $9550 transfer to her HSA was "excess" and subject to a 6% additional tax.  She made no other contributions to her HSA, and my only contribution to my HSA was $1000 due to age.  As best I can tell, there is no "excess".  I can't find any IRS rules (income limits, etc.) that would subject this transfer to the additional 6% tax.

Is this a Turbotax bug, or what am I missing?

[dmertz]

Make sure that your wife's contribution was not also reported in the HSA section as a personal contribution.  Your $1,000 contribution should be reported as a personal contribution (assuming that it was not a contribution reported with code W in box 12 of your W-2), but not hers.

Also make sure that in the HSA section you have shown her to be covered for each month of the year with no disqualifying coverage such as Medicare.  Line 8 of her Form 8889 should show $9,550 as the amount that she was eligible to contribute.

[kagiyama]

Her contribution is personal.  She did not work in 2025.  She was just using the once-in-a-lifetime IRS rule to transfer trustee to trustee from her IRA to HSA.  My contribution was also personal.  There were no other contributions.  The HPDP is correctly marked for the full year for both of us, and neither of us was on Medicare.  Line 8 on 8889 correctly shows as $9550, and form 1040 shows it as non-taxable ordinary income.  I just don't understand why the $9550 is flowing to form 5329 and subject to a 6% excess contribution tax.  

Appreciate the reply, any other ideas?

[dmertz · Accepted solution]

Just to be clear, the $9,550 must not be entered anywhere other than during the entry of the Form 1099-R.  If it's separately entered in the HSA section, it will appear on your wife's Form 8889 line 2 and line 10, doubling your wife's reported contributions to $19,100.  Line 2 of your wife's Form 8889 must remain blank.

[kagiyama]

Sorry, I have not had a chance verify.  I'm pretty sure the only entry was the flow form the 1099-R issued by my brokerage, but will quadruple-check.  Otherwise, I think it's a link error in TT from form 8889, line 12 to form 5329, line 47.  Thanks again for the suggestion and I'll reply back after I've had to chance to check.

[Opus 17]

The contribution is only entered from the form 1099-R, not as a separate contribution.  And, the 1099-R needs to be code 1, I don't think Turbotax will ask the HSA question if any other code is used.  If another code is used, change it to code 1 in program.   When Turbotax sees a code 1, it will say, "this is taxable but let me ask about situations that might change the tax" and one of those situations is direct HSA contribution.  

You also need to make sure you run the HSA interview to indicate that you (she) has qualified coverage for the whole year.   You should indicate that she is "covered" by a qualified HDHP even if the policy is through your employer or in your name.  She is "covered" if she is covered, even if she is not the "owner."

[kagiyama]

It was not necessary to fiddle with the distribution codes.  In the HSA interview, the question for contributions did not make it clear that I should not enter anything that flowed from a 1099-R.  Even though you had pointed out to not enter the amount, I must have assumed that field was pre-populated when trying to figure out what I was doing wrong.  Anyway, blanked out the contribution amount, and everything looks great now.  Appreciate the help and the patience!