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TT taxing HSA contribution paid with qualified IRA trustee-to-trustee transfer

Forum|Forum|6 years ago
January 17, 2020
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I funded my HSA with the once-in-a-lifetime IRA transfer. In January 2019, I funded the account for 12 months contribution amount. I changed medical plans in October and no longer had an HDHP. I withdrew the amount I over-funded. TT is including the full IRA transfer amount and the amount I withdrew as additional taxable income on Schedule 1, line 8. I assumed that the amount I withdrew would be taxable but not the IRA amount. Is this a bug is TT?

TurboTax Premier Windows

Best answer by dmertz

TurboTax is correctly handling this failure to complete the testing period for an HSA Funding Distribution.

The distribution from the IRA is only an HSA funding Distribution if you report it as an HSA Funding DIstribution. You'll likely make out better if, when entering the Form 1099-R for the distribution from the traditional IRA, you tell TurboTax that you did not put any if this money into an HSA, then enter the amount transferred put into the HSA as a regular personal contribution. Due to the deduction you get for the eligible HSA contribution, the result will be that you will only pay income tax on the excess (rather than on the full amount distributed from the IRA as an HFD) although you will pay the 10% early-distribution penalty on the entire amount distributed from the IRA.

To reenter everything I suggest first deleting the Form 1099-R and the Form 8889, then reentering the Form 1099-R and revisiting the HSA section.

D

dmertzAnswer

Employee

TurboTax is correctly handling this failure to complete the testing period for an HSA Funding Distribution.

The distribution from the IRA is only an HSA funding Distribution if you report it as an HSA Funding DIstribution. You'll likely make out better if, when entering the Form 1099-R for the distribution from the traditional IRA, you tell TurboTax that you did not put any if this money into an HSA, then enter the amount transferred put into the HSA as a regular personal contribution. Due to the deduction you get for the eligible HSA contribution, the result will be that you will only pay income tax on the excess (rather than on the full amount distributed from the IRA as an HFD) although you will pay the 10% early-distribution penalty on the entire amount distributed from the IRA.

To reenter everything I suggest first deleting the Form 1099-R and the Form 8889, then reentering the Form 1099-R and revisiting the HSA section.