Since my contribution to my local bank's HSA is AFTER tax, I shouldn't have to pay a penalty or at least not a large one. If I am penalized, how much?
There's really no such thing as an "after tax" HSA. "Pre-tax" contributions are deposits into an HSA made by your employer, and those deposits never show up in Box 1 of your W-2 and are never taxed. "After-tax" contributions are deposits made by you with the funds coming from your (after-tax) checking account, but you get to take a deduction for those deposits so the effect is exactly the same as making a pre-tax contribution.
The "after tax" contributions you think you made may have been made with after tax $$$ but you got the deduction on your return so they are really treated just like "pre-tax"contributions made thru the payroll system as TomY said... and as Opus 17 said below that is not how it works.
Yes, I have an "after tax"HSA in which I make contributions at my local bank. I get my paycheck and then I manually contribute to my HSA. I also have a pretax HSA with my work. I understand the difference.
So, it would make no sense to be taxed on the amount withdrawn as income since it was after tax contribution. I'm not certain if the 20% penalty would apply still.
I know its a different scenario than most people have. Perhaps when I started my HSA at my local bank about 7 years ago, you could contribute after tax money.
There is no such thing as an after-tax HSA. If you get a form 1099-SA at the end of the year to report your withdrawals, and you get a form 5498–SA to report your contributions, then it is a regular HSA. You are supposed to report those contributions on your tax return and take a text adduction for them. If you have not been taking the tax deduction, then it is still an HSA and withdrawals for nonqualified spending purposes are still subject to income tax and a 20% penalty. If you don't report it and pay the tax, the IRS will come after you, because they get copies of all the documentation and will know that it was not reported properly on your tax return. If you have for some reason been failing to claim the tax deduction in past years, you may be able to fix some of that on an amended return. You may want to see a tax advisor.
If you do not get a form 1099-SA, but instead get a form 1099-INT for interest income, then it is not an HSA, it is a regular savings account. Although it might be marketed by the bank in a different way. If it is a regular savings account, you can do anything you want with the money.
A Roth IRA is another kind of tax advantage retirement account of that you might own. With a Roth IRA, you can withdraw your original contributions at any time without penalty. You would only pay a penalty if you withdraw the interest or gains before retirement age. But a Roth IRA is not an HSA.
Sorry, that's not how it works. After-tax HSA contributions are deductible from your income, that's the whole point of an HSA. You take the deduction using form 8889 (which combines all your employer, payroll and after-tax contributions) and you get the deduction for after tax contributions on line 25 of form 1040.
As a result, withdrawals from any HSA that are used for non-qualified purposes are subject to regular income tax (to recover the deduction) plus a 20% penalty.
The 20% penalty only applies if you are under age 65 at the time of the distribution.
Yes, I have an "after tax"HSA in which I make contributions at my local bank. I get my paycheck and then I manually contribute to my HSA. I also have a pretax HSA with my work. I understand the difference.
So, it would make no sense to be taxed on the amount withdrawn as income since it was after tax contribution. I'm not certain if the 20% penalty would apply still.
I know its a different scenario than most people have. Perhaps when I started my HSA at my local bank about 7 years ago, you could contribute after tax money.
You may contribute pre or post tax to HSA. But once you have made either contribution, that money is all the same and is subject to the rules of HSA distributions as stated above.
Just because you received money, paid tax on it, then contributed it to an HSA does NOT make it a "after tax" HSA. When you do that, the contribution should then be a tax deduction on your tax return. The deduction that you were eligible to make on your tax return therefore makes it a pre-tax HSA contribution.
I agree that it may not be called a "after tax" HSA, but that is the only way I can describe it. My bank sends my expenditures to IRS and they are reported on line 14a of form 8889. But my question is this, how can I withdraw money(for personal use) from my bank's HSA in which it is all funded with after tax dollars and not have my bank send to IRS indicating it as distribution? Thanks
You received a deduction on your tax return for that contribution. That means you have already received the tax savings. If you withdraw it for non-medical purposes (non-qualified distribution), it will be taxable because you already deducted it on your tax return.
The 'net result' would be zero income tax (previous deduction, now currently taxable), but you would also pay a penalty for a non-qualified distribution (payment for something other than medical expenses).
"Yes, I have an "after tax"HSA in which I make contributions at my local bank. I get my paycheck and then I manually contribute to my HSA. I also have a pretax HSA with my work. I understand the difference."
I'm not sure you do, so let's try an example.
Pre-tax contribution:
Let's say you get a paycheck in the first week of the year. We'll say that the gross amount of pay you earned is $2,000, but you elected to have your employer put $50 in your HSA for you. If you got a W-2 right after receiving that paycheck the W-2 would report Box 1 income of $1,950 and, (assuming no other adjustments), that would be your Adjusted Gross Income if you had to prepare an income tax return.
After-tax contribution:
Continuing, Let's say you get a paycheck in the first week of the year, with a gross amount of pay earned being the same $2,000, but no HSA deduction. We'll further say that the day you get your paycheck you deposit $50 into your HSA. If you got a W-2 right after receiving that paycheck the W-2 would report Box 1 income of $2,000, and if you had to prepare an income tax return line 7 of your Form 1040 would indicate"$2,000." But on line 25 of that Form 1040 - "
Health savings account deduction. Attach Form 8889" - you'd list $50 as a deduction and your Adjusted Gross income would be $1,950, exactly the same as if you made the deduction pre-tax.
So, making a contribution to an HSA with after-tax money doesn't change the "nature" of the money inside the HSA.
Maybe what you're really saying is that you've been contribution after-tax money to an IRA and not taking the deduction. That would certainly make the money inside the HSA "after tax", but to the best of my knowledge and belief there's absolutely no provision in the tax law for having "basis" in an HSA, like there is with an IRA. Indeed the exceptions to the 20% additional tax read:
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HSA distributions included in income (line 16) are subject to an additional 20% tax unless one of the following exceptions applies.
The additional 20% tax does not apply to distributions made after the account beneficiary:
Dies,
Becomes disabled (see Disabled, earlier), or
Turns age 65.
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You see how there's not "distribution is a return of basis" exception?
If you haven't been taking the deduction then I'd suggest that you immediately file amended income tax returns for all open years.
Tom Young
Hey all, I just realized that my former employer has not been taking my HSA contributions out pretax. Basically, they would deposit my post-tax money into two bank accounts: 1) primary checking 2) my HSA. I was the only one at my small company doing the HSA plan and they clearly didn't know how it worked.
Anyway, it's a small company and they will not respond to me to help fix this problem. Is there anything I can do come tax time to resolve this?
There is nothing wrong with that ... however you should have no box 12 code W entry on the W-2 ... in your case you will make the HSA contribution entry yourself ...
https://ttlc.intuit.com/questions/2766470-where-do-i-enter-my-hsa-contribution
@kwtansel Because your employer has deposited your HSA money after-tax, you will be claiming the income tax savings on your tax forms when you file. However, you will not be able to save the Social Security and Medicare taxes paid on the HSA amount. Had your employer deposited the HSA money pretax, then you would have saved on those taxes as well.
If I funded my 2019 HSA after Jan 1 2020, how do I note this on my taxes in order to be refunded for the taxes that I already paid on my $3,000 contribution? Do I just reduce my income on my W-2 by $3K?
Since you mention already having paid taxes on this money, presumably it was a personal contribution. If it was a personal contribution for 2019, you just enter it as such on the Let's enter your HSA contributions page. You'll receive a deduction on Schedule 1 line 12 for this contribution.
However, if it was a contribution made through your employer by payroll deduction, answer Yes when asked if your employer told you about any other contributions, then enter the amount in the box for Employer and payroll contributions made in 2020 for tax year 2019. Your employer will exclude this amount from box 1 of your 2020 Form W-2, so you will not be paying taxes on it.