Tax TreatmentQuestion 231 of 315
Which statement BEST describes the federal tax treatment of a Health Savings Account (HSA)?
a.Contributions are deductible (or pre-tax through payroll), growth is tax-deferred, and qualified medical withdrawals are tax-free
b.Contributions are made with after-tax dollars and qualified withdrawals are taxed at long-term capital gain rates
c.Contributions are tax-free, but all withdrawals are taxed as ordinary income
d.The account is taxed annually on its earnings, but qualified medical withdrawals receive a 10% credit
Explanation
An HSA under IRC §223 provides the well-known triple tax advantage: deductible (or pre-tax) contributions, tax-deferred growth inside the account, and tax-free distributions when used for qualified medical expenses. Non-qualified withdrawals are taxable as ordinary income plus a 20% penalty if taken before age 65.
Law Reference: IRC §223Practice all 315 questions free — no signup required.
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