Intuit Academy Tax Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

A withdrawal from a Health Savings Account (HSA) incurs taxes when it is not used for qualified medical expenses. HSAs offer tax advantages, allowing individuals to make tax-deductible contributions, enjoy tax-free growth, and withdraw funds tax-free when those funds are used for eligible medical costs. However, if the funds are withdrawn for purposes other than qualified medical expenses, the withdrawal is subject to income tax and may also incur a 20% penalty if the account holder is under age 65.

The different scenarios outlined in the other options help clarify why they don't lead to taxation on withdrawals. Withdrawals made for qualified medical purposes are not subject to tax, which supports the concept of the HSA being a tax-advantaged account. Additionally, withdrawals from retirement accounts are handled under different rules and do not pertain to HSAs. Lastly, exceeding contribution limits has its own set of penalties, but does not directly affect the tax status of withdrawals. Therefore, the essence of HSA withdrawals leading to taxation is firmly linked to their use for non-qualified expenses.