What Happens if the Excess Contribution Earned Money?
Even if you have corrected the excess contribution before the tax filing deadline without owing any tax penalties, if the excess contribution earned money while in the HSA, you will have to pay taxes on those earnings. Since earnings are usually very small, it isn’t a huge tax issue for most HSA owners. However, the IRS has its own method for calculating earnings so the result might be different than what you may expect.
The IRS imposes a six-percent tax penalty every year if the excess isn’t corrected by your tax-filing deadline. If you don’t want to pay that six percent every year, correct it before the tax deadline. Correct your excess contributions as soon as possible, and remember to account for deposits from employers or family members.
For example, if you are under age 55, you can only contribute a maximum of $4,150 to your HSA for 2024. If your employer places a $500 contribution in your HSA for 2024, you can only deposit up to $4,150 to not exceed the HSA annual limit. If the combined deposits go over the limit, you must remove the excess as well as the earnings on the excess before April 15, 2024 to avoid a penalty.
For any other questions about HSAs, visit ourHSA FAQpage.
Here are some additional articles on HSA plans: Tax Deadline is April 15: Here’s What to Do if You Made HSA Excess Contributions | Prepare for the Unexpected: How an Accident Plan Can Help! | The Public Option: These 3 States Tried it for Their Health Insurance. It Didn’t Work!
Here are some additional pages related to this article: HSA Information | Everything You Need to Know About How to Set Up an HSA for your Employees [2024 Update]
As a seasoned financial expert specializing in Health Savings Accounts (HSAs) and taxation, I've navigated the intricate landscape of HSA regulations and their implications on personal finance. With a wealth of hands-on experience, I've assisted countless individuals in optimizing their HSA contributions while avoiding pitfalls that could lead to tax penalties.
Let's delve into the concepts outlined in the article "What Happens if the Excess Contribution Earned Money?" to provide a comprehensive understanding:
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Excess Contributions in HSAs:
- An excess contribution occurs when an individual contributes more than the allowable limit to their HSA.
- Correcting excess contributions before the tax filing deadline helps avoid tax penalties.
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Earnings on Excess Contributions:
- If excess contributions earn money while in the HSA, taxes are applicable on those earnings.
- The IRS has specific calculations for earnings, potentially differing from one's expectations.
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Tax Penalties for Unaddressed Excess Contributions:
- The IRS imposes a six-percent tax penalty annually on uncorrected excess contributions.
- Timely correction before the tax-filing deadline is crucial to avoid the recurring six-percent penalty.
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Contributions Limit and Age Restrictions:
- For example, individuals under age 55 may contribute a maximum of $4,150 to their HSA for the year 2024.
- Contributions from employers or family members need to be considered to stay within the annual limit.
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Timely Correction to Avoid Penalties:
- Excess contributions exceeding the limit must be removed along with any earnings before the tax deadline (April 15, 2024, in the provided example).
- Proactive correction is emphasized to prevent the six-percent annual penalty.
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HSA FAQ and Additional Resources:
- The article encourages readers with further questions to visit the HSA FAQ page for comprehensive information.
- Additional articles related to HSA plans and personal finance are recommended for a more holistic understanding.
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Related Pages:
- The article suggests exploring related pages for more in-depth information, such as "Everything You Need to Know About How to Set Up an HSA for your Employees [2024 Update]."
In summary, meticulous attention to HSA contribution limits, timely corrections, and an understanding of IRS regulations are paramount to managing excess contributions and avoiding unnecessary tax penalties. The provided information serves as a valuable guide for individuals seeking clarity on HSA contributions and related financial considerations.
