What penalty tax is applied to non-qualified distributions from an MSA?

The correct penalty tax applied to non-qualified distributions from a Medical Savings Account (MSA) is 15%. Non-qualified distributions are those that do not meet the requirements set by the IRS for eligible medical expenses. When funds are withdrawn from an MSA for purposes that do not qualify, the IRS imposes a penalty tax to discourage the misuse of these tax-advantaged accounts. This penalty tax is designed to ensure that MSA funds are used primarily for healthcare-related expenses, as intended.

In general, penalties on non-qualified distributions are common in various tax-advantaged accounts to promote compliance with regulations and correct usage. Understanding the specifics of this penalty tax is crucial for individuals utilizing MSAs, as it affects financial planning related to healthcare costs and tax liabilities.