Paid Tax on Excess Hsa Contributions Last Year Why Do I Need to Pay Again This Year

Health savings accounts allow y'all to save coin for healthcare-related expenses on a tax-advantaged basis. Similar to individual retirement accounts (IRAs), the IRS limits annual contribution limits to an HSA. Saving over the limit will result in an HSA excess contribution. In that scenario, there are two things y'all tin can practice to right excess contributions to an HSA. A financial advisor can help you figure out how to bargain with excess contributions in health savings accounts. Detect one using SmartAsset'southward costless financial advisor matching service.

What Is a Health Savings Account?

A health savings account or HSA is a revenue enhancement-advantaged programme that'due south designed to help you save for future healthcare needs. HSAs are bachelor with high deductible health plans. Yous may have access to an HSA through your employer'due south health insurance plan or coverage your purchase yourself if you're self-employed.

These plans offer a triple tax benefit, in the course of:

• Tax-deductible contributions
• Tax-deferred growth
• Tax-free withdrawals when distributions are used to pay for qualified medical expenses

A 20% penalty applies when taking coin from an HSA for any purpose other than qualified healthcare expenses earlier age 65. Once you turn 65, you lot can withdraw money from an HSA for whatever purpose only you'll pay ordinary income revenue enhancement on the distribution.

HSA Contribution Limits

Both employers and employees tin make HSA contributions each year, co-ordinate to the limits set past the IRS. HSA contribution limits are determined by the type of coverage. There are limits for individual plans and family plans. Here's how the limits compare:

• Individual programme limit (2021): $3,600
• Family unit plan limit (2021): $7,200
• Individual plan limit (2022): $3,650
• Family plan limit (2022): $seven,300

Grab-upwards contributions are too allowed for savers aged fifty and older. The grab-upwards contribution limit for HSAs is the same as the catch-up contribution limit for IRAs: $1,000.

What Is an HSA Excess Contribution?

Excess HSA contributions are contributions that exceed the almanac limit allowed past the IRS. This includes contributions over the limit made by yourself or your employer. For example, say you have individual HSA coverage. You contribute $iv,000 to your plan for the year but you're not fifty or older. The $350 you contribute over the $3,650 that's allowed would be considered an excess HSA contribution.

In that location are unlike reasons why an HSA backlog contribution might occur. Typically, it can be chalked up to one of the post-obit:

• Failing to proceed track of employer contributions while also making contributions yourself
• Miscalculating the amount needed to max out your contribution for the twelvemonth
• Making irregular contributions, without keeping a running tally of how much yous've saved on a year-to-engagement basis
• Combined contributions exceeding the limit because yous've saved in multiple plans during the year (for example, equally the result of a chore change)
• Changes in eligibility or program status, i.e. switching from a family program to individual coverage

Regardless of how excess contributions happen, they can add together a wrinkle to your tax filing for the year. And so it's important to know what to practise if you lot add up your HSA contributions and realize that you've gone over the limit.

How to Right HSA Excess Contributions

Whatever excess HSA contributions are subject to regular income tax and a half-dozen% excise tax each year until they're corrected. If yous find that you've over-saved in your HSA for the yr, at that place are two ways yous can handle this state of affairs.

• Remove excess contributions and the internet income from those contributions before filing your federal income revenue enhancement return for the year
• Leave the excess HSA contributions where they are and carry them forward to a future tax year

With the beginning pick, y'all'd need to be able to withdraw any contributions over the allowed limit before the tax filing deadline. You lot can also choose this option if you've filed a revenue enhancement extension so you lot have more fourth dimension to get your return in. Yous'll have to pay income tax on the excess amount removed from your HSA if you go this route. But you can avoid the 6% excise revenue enhancement if yous take out all of the excess contributions.

In the second scenario, yous don't accept to go through the trouble of removing excess contributions from your HSA. Instead, y'all can deduct some or all of the excess contributions made and apply them to a future yr'southward contribution limit. If you cull this option, y'all'll owe 6% excise revenue enhancement on any backlog contributions that are non rolled over to a future year. Once more, you lot'll need to do this before the tax filing deadline, including the extension deadline if you requested more time to file.

Between the two, simply removing HSA excess contributions is usually the easiest way to become in terms of taxation filing. In either case, you'll demand to piece of work with your HSA custodian to right backlog contributions. They can decide what amount of excess funds to report to the IRS, which you'll need when you file your revenue enhancement render. If you're removing excess contributions, those are reported on Form 1099-SA every bit a distribution in Box 1. In Box 2, you'll come across earnings on excess contributions that are withdrawn.

Fugitive HSA Excess Contributions

If yous'd rather avoid the headache of dealing with excess contributions to an HSA, planning ahead tin help. Specifically, you can:

• Understand your coverage blazon and almanac contribution limits
• Utilize an HSA contribution calculator to make up one's mind how much yous can save per calendar month without exceeding the annual limit
• Ask your employer how much they'll contribute to the programme on your behalf for the year

Keeping track of your contributions to engagement is as well important if you lot anticipate a change in your program status or a task change. If you lot move to a new company midway through the year, for example, you'd desire to know how much you saved in your previous employer's HSA to determine how much room yous accept left to save in your new HSA if you lot have 1.

Earnings don't count toward your annual HSA contribution limit, just the money you or your employer adds to the plan. And so another way to make the most of your plan is to choose your investments carefully in gild to generate the best returns possible, based on your goals and adventure tolerance. Talking to a financial counselor can help y'all determine which HSA investment offerings make the near sense for y'all.

The Bottom Line

Making an HSA excess contribution isn't the end of the world, but information technology can mean having to accommodate your taxation filing to account for those contributions. If you're unsure how much you can contribute to your plan for the year or how much y'all've contributed and so far, reaching out to your benefits coordinator or HSA plan administrator is a skilful place to start. From there, you can plan your strategy for managing HSA contributions each year.

Retirement Planning Tips

• If you take access to an HSA it'due south of import to review your investment options carefully. Common funds and exchange-traded funds (ETFs) are typical offerings with HSA plans simply they aren't all alike. Specifically, consider the performance of each fund and the expense ratio you'll pay to own information technology. This tin can help you to choose the right funds for diversification while as well managing fees.
• Consider talking to a financial advisor most how to correct or avoid excess HSA contributions or whether an HSA might exist correct for you. Finding a qualified fiscal advisor doesn't have to be hard. SmartAsset's gratis tool matches y'all with up to iii financial advisors who serve your area, and you can interview your advisor matches at no cost to determine which one is right for you. If you're ready to discover an advisor who can help yous achieve your financial goals, get started now.

Photo credit: ©iStock.com/designer491, ©iStock.com/zimmytws, ©iStock.com/AndreyPopov

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning skillful who has been writing about personal finance for a decade. Her expertise in the finance niche besides extends to home ownership, credit cards, banking and small business. She's worked straight with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.Due south. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the Academy of South Carolina and she also attended Charleston Southern University as a graduate educatee. Originally from fundamental Virginia, she at present lives on the North Carolina coast along with her two children.

lincolnfalas1986.blogspot.com

Source: https://smartasset.com/retirement/hsa-excess-contributions

Share this post