After enrolling in Medicare and purchasing a supplement, Rachel withdrew $2,000 from her HSA. She used $600 to pay her Medicare Supplement premium, $200 for out-of- pocket medical expenses, and the remaining $1,200 on a trip to celebrate her retirement. When preparing her taxes for the year, she discovered that:

After enrolling in Medicare and purchasing a supplement, Rachel withdrew $2,000 from her HSA. She used $600 to pay her Medicare Supplement premium, $200 for out-of- pocket medical expenses, and the remaining $1,200 on a trip to celebrate her retirement. When preparing her taxes for the year, she discovered that:



A. $1,200 was subject to income tax plus a 20% penalty


B. $2000 was subject to income tax and a 20% penalty


C. The entire amount was tax free


D. $1,200 was subject to income tax



Answer: D.

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