A health savings account (HSA) is designed to help you pay for medical expenses if you have an insurance plan with high premiums. For many, an HSA is also a way to lower your yearly tax bill through deductions, invest your money and prepare for the unexpected. While there are many reasons to use this kind of account, there is a penalty for using HSA funds for non-eligible expenses.
What Is the Penalty for Using HSA Funds?
If you are using an health savings account to cover eligible medical expenses, then you are fine. If you reach for your HSA debit card to pay for a meal at McDonald's, you are going to run into problems. While it sounds crazy to unintentionally use your card, it does happen. Whether you confused your different debit cards or just really needed extra cash, there may come a time when you use HSA funds for non-covered expenses. In addition, some people deliberately use their HSA funds because they need the money for something else. …show more content…
The tax code does not make things that simple. If you use your HSA funds for take out, you cannot just pay it. You have to report distributions that are made for ineligible purchases.
When you report your ineligible purchases, your misused funds are counted as income. Basically, these distributions end up being taxable on your 1040 form and you also pay a 20 percent penalty. The only good news is that you can avoid the penalty (but not the income tax) if you are over the age of 65, are disabled or die.
Is There Always a Penalty for Using HSA
What Is the Penalty for Using HSA Funds?
If you are using an health savings account to cover eligible medical expenses, then you are fine. If you reach for your HSA debit card to pay for a meal at McDonald's, you are going to run into problems. While it sounds crazy to unintentionally use your card, it does happen. Whether you confused your different debit cards or just really needed extra cash, there may come a time when you use HSA funds for non-covered expenses. In addition, some people deliberately use their HSA funds because they need the money for something else. …show more content…
The tax code does not make things that simple. If you use your HSA funds for take out, you cannot just pay it. You have to report distributions that are made for ineligible purchases.
When you report your ineligible purchases, your misused funds are counted as income. Basically, these distributions end up being taxable on your 1040 form and you also pay a 20 percent penalty. The only good news is that you can avoid the penalty (but not the income tax) if you are over the age of 65, are disabled or die.
Is There Always a Penalty for Using HSA