Does A Qualified HSA Distribution Eat Away At That Year's Contribution Tax Break?

ikbok | Jan 26, 2025 | 60 posts since 2023

I hope someone can answer this! If I contribute $4300 to an HSA in 2025 then that's $4300 the IRS usually never "sees" as income to tax that year, so I get an up-front tax break on that $4300.

But what if I also take out $4300 as an HSA-qualified distrubiton that same year? Do I still get any tax break on my $4300 contribution, or is instead no tax break at all after a distribution for the same amount as contributed that year? Does a qualified HSA distribution "eat away" at that year's contribution's up-front tax break?

Looking at IRS Form 8889 (lines 10-13) it seems to suggest that any distribution takes away from the up-front tax break you'd get from contributing, or am I wrong?

I had a little over $4300 in medical bills for a small surgery I just did. But instead of just paying it from my normal taxable account, I first made a 2025 HSA contribution of $4300 (yearly max), then a few days later took out $4300 from my HSA to pay those medical bills. Was doing that all for nothing? Is there no difference than if I had just paid the $4300 from my normal non-HSA account instead?

3

Answers

Steve58 | Jan 27, 2025 | 459 posts since 2018

You will get the full HSA Contribution as a tax deduction and shows up in Part 1 of form 8889.

Distributions from your HSA are reported on form 1099-SA which you receive from the HSA administrator. This distribution amount shows up on form 8889 in Part II, line 14a. You then have to make sure you manually enter in 8889 Part II line 15, the amount of the distribution that is medically qualified, and maintain these records in case of an audit. You do not get any form from your HSA administrator to say what is medically qualified. If you forget to enter the amount in line 15, you will pay taxes (and a penalty if you are under some age, like 85, I think).
I assume that you have never used an HSA before, and it is not clear why the tax question for 2025, since we are doing taxes for 2024 now. The only concern I have with your question is when did you make the contribution, and when did you have the surgery? Not when did you take the distribution from your HSA. You also must make sure your plan is a qualified HDHP medical plan for the year in which you are making a contribution to your HSA for that year.

Part 1 Line 10 has nothing to do with medical spending distributions.

"Line 10 Qualified HSA funding distribution. A distribution from your traditional IRA or Roth IRA to your HSA in a direct trustee-to-trustee transfer is called an HSA funding distribution. Note that these funds are not being distributed from your HSA, but rather are being distributed from your IRA and contributed to your HSA. Enter this amount on line 10."

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ikbok | Jan 27, 2025 | 60 posts since 2023

Thank you!! Good to hear but wow is it confusing. When line 10 of Form 8889 says "Qualified HSA funding distributions" you'd think that's a distribution out to pay for qualified things like medical bills, not some kind of IRA to HSA transfer! Only in the IRS instructions does it say what you pointed out, that "qualified HSA funding distribution" on line 10 is for "a distribution from your traditional IRA or Roth IRA to your HSA in a direct trustee-to-trustee transfer." Wow. So thanks! Glad to hear it was worth doing.

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Steve58 | Jan 27, 2025 | 459 posts since 2018

Now some food for thought on HSAs. An HSA is like an IRA. You can put money into it, you can invest it in the stock market or CDs, all tax free. Depending on your financial situation, it is best to put the money in it and invest it tax free and allow it to grow for many years.

You can save your medical expenditure records from this years surgery, and withdraw it as a tax free distribution any year in the future when you might need the money. This assumes you can afford to put in 4600 into your HSA and pay for your surgery with out of pocket moneys this year.

As an example, i contributed for several years before I retired at 57 in 2016. I at first was using it to pay all my medical expenses like you are doing this year. But then I realized it was much better to save the medical records and just invest the full HSA amount. I put it all in the stock market, and the 28,000 I had in the HSA when I retired has now grown to 83000 in 8 years (without making any more contributions since i no longer had an HDHP). I have saved up 28000 in medical expense records for those 8 years, which I can now take out as a tax free distribution at any time, leaving me 55000 for future medical expense distributions.

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