Overfunded HSA: I’ve used almost all the funds in my HSA which I overfunded in 2018. Is the only option to pay the 3% penalty on the overage?

[KatKat]

Overfunded HSA:  I used my one time ability to fund an HSA with my IRA money.  I’m retired and turned 55 in 2018.  I funded the account with the full $7900, unfortunately forgetting that my husband had an HSA also.  TT wants me to pay back the overage to avoid the 3% penalty, but I’ve used $4200 in 2018 and only have $1800 left this year.  Is my only option to just pay the 3% penalty?

[BMcCalpin · Accepted solution]

Yes, pretty much. But read the following.

This is what will happen. NOTE: bullet #4 has a way around the penalty, if you have the money to withdraw in both the HSAs added together.

• TurboTax will tell you that you have an excess contribution
• TurboTax will ask you which HSA is in excess - for the sake of simplicity, let's say it's yours.
• TurboTax will add the amount of the excess to Other Income on line 21 on Schedule 1 (Form 1040).
• You will tell TurboTax how much you will withdraw before April 15th. NOTE: you can withdraw the excess from both of your HSAs if the money is there. On the screen on which TurboTax asks you "Who made the Excess Contribution?" say both of us and indicate how much money is coming out of which HSA. 
• You will contact your HSA custodian(s) before April 15th and request a "withdrawal of excess contributions" (use this exact phrase).
• The HSA custodian will send one or both of you a check for the amount withdrawn.
• The amount of the HSA excess that could not be withdrawn will carry over to 2019.
• The amount of the carryover will be penalized the smaller of 6% of the carryover or the value of your HSA(s) on December 31, 2018.
• On the 2019 tax return, the carryover will be applied as a personal contribution to whichever HSAs had the excess and carryover. This means that you must reduce your normal 2019 HSA contributions to allow for this contribution (and to stay under the annual HSA contribution limit). Otherwise, you will perpetuate the carryover and be penalized again.

[KatKat]

Thank you!  This was very helpful!

[clachmann107]

So I believe we will have the same situation here at my household.  I believe we are over by about $500 give or take.  If I am reading the below reply correctly, if I have the funds in my account or in both our accounts at the end of 2019 then we can have the amount withdrawn and sent to use via check, from our HSA institution.  So I tell TT I am doing that and I do, what happens then?  I won't have any excess that rolls over to 2020 so I wouldn't be charged the 6% tax right?  I am also assuming that by withdrawling it that is taxed at a lower rate or something correct?  

[DaveF1006]

If you return the excess contribution by April 15, 2020, you will not be charged the 6% penalty on the excess contribution. If you indicate in Turbo Tax that you intend to withdraw the contribution, IRS will take you on your word. If you are audited however, you will need proof of that check sent to you by your HSA trustee.

This 6% penalty tax has nothing to do with how your tax rate is calculated your return. The tax rate is based from taxable income that is determined by adjusted gross income minus your standard or itemized deductions reported in your return..