Nonqualified distributions from a health savings account (HSA) have a tax penalty of

• A. 20%
• B. 10%
• C. 0%
• D. 5%

Answer: (A)

Nonqualified distributions from an HSA are charged a 20% penalty because HSAs are designed to fund qualified medical expenses with tax advantages. When you withdraw for nonmedical purposes, that money loses the tax-advantaged treatment: the distribution is included in your gross income and an additional 20% penalty is added. This penalty helps ensure the funds are used for legitimate medical needs.

There is an exception: once you’re 65 or older, the penalty no longer applies to nonqualified distributions, though those withdrawals are still taxed as ordinary income if not used for qualified medical expenses.