Nonqualified medical expense distributions from a Health Savings Account (HSA) incur what tax penalty?

Nonqualified medical expense distributions from a Health Savings Account (HSA) are subject to a 20% tax penalty. This penalty applies to funds taken out of the HSA that are not used for qualified medical expenses. The intention of HSAs is to encourage individuals to save for future medical costs while offering tax advantages. However, when account holders withdraw money for nonqualified expenses before reaching the age of 65, the 20% penalty is enforced alongside the requirement to include the distribution as taxable income.

Once an individual reaches the age of 65, they can withdraw HSA funds without incurring the penalty, regardless of whether the money is used for qualified medical expenses. However, any amounts taken out for nonqualified expenses would still be taxable at that point. This understanding is crucial for anyone utilizing an HSA, as it helps in planning the use of funds and avoiding unnecessary penalties.