Closing US Health savings account (HSA)

[skarme312]

I use to live and work in the States but have returned to Canada just before the pandemic.

I have about 18 K USD sitting in a low interest savings account (0.05% interest) in the US. I have not had the need to withdraw funds even once for qualified expenses here in Canada as insurance from my spouse's employer has been more than enough to cover our needs. The HSA provider also does not allow for a Canadian address on file so I have to rely on family to send me new debit cards, statements, etc.

In short, it's proving to be a pain to deal with the HSA and if I close the account and move the funds to Canada and put them in a higher interest account or the stock market I may see it grow and offset the taxes and penalties rather than have it sit in a low interest account and see virtually no growth. This brings me to taxes and penalties. From my research, all the funds I withdraw from the HSA will count as income and I will need to pay federal tax on that. Additionally I will incur a 20 % penalty for early withdrawal as I'm under 65. My confusion is regarding the 20 % penalty. I reached out to a few cross border tax folks and got conflicting answers regarding if the penalty will be allowed as a tax credit on the Canadian return. Researching online has info for 401k to RRSP rollovers which does allow for the penalties to be claimed as tax credit, but no real info on HSA. Any suggestions on what to do in this case and if the HSA early withdrawal penalty will be considered as tax credit on Canadian returns.

[nelsona]

The same rule that applies for 401k/IRA penalties applies to any other penalties arising on early withdrawals. The "penalties" thet CRA does not accept is for late/delinquent filing.

[skarme312]

nelsona wrote:
> The same rule that applies for 401k/IRA penalties applies to any other
> penalties arising on early withdrawals. The "penalties" thet CRA
> does not accept is for late/delinquent filing.

Thank you so much for your reply. I did ask the CRA and they got back to me right away saying that there was a ruling for 401k/IRA and providing me with a doc which is the same as:

https://taxinterpretations.com/node/393060

For HSA they said they will get back to me. I guess it was an odd ball for them.

[nelsona]

I think you can safely assume that it is a tax rather than a penalty for an HSA.
Keep us informed.