Question

Cheryl took early retirement at age 55 last year and received a $10,000 taxable distribution from her HSA during the year. What, if any, tax penalty will be imposed on her HSA distribution if no exception to the penalty applies?

Answer 1

Answer:

Cheryl's tax penalty on her HSA distribution is:

$2,000.

Explanation:

a) Data and Calculations:

Retirement age = 55

Taxable distribution from HSA received = $10,000

Tax penalty on HSA distribution = 20%

= $10,000 * 20% = $2,000

b) A tax penalty on HSA distribution of 20% is imposed if the distribution is not a qualified medical expense.  This penalty applies since Cheryl is under 65 years of age.  Note that if Cheryl's withdrawals are for qualified medical expenses, they are tax-free.