The IRS gives one account three separate tax advantages

Many retirement accounts expose Americans to taxes at one point or another, either when money goes in or when it comes out.

A traditional 401(k) can reduce taxes upfront, but withdrawals are taxed later. Roth IRAs work the other way around: contributions are taxed, while qualified withdrawals are not. One lesser-known account, however, offers tax benefits at every step.

Created under Section 223 of the Internal Revenue Code, the Health Savings Account (HSA) allows eligible people to contribute pretax dollars, invest and grow the funds tax-free, and take tax-free withdrawals for qualified medical expenses.

Even with that triple tax break, HSAs are still often overlooked as a way to help cover healthcare costs in retirement. Fidelity Investments says only 23% of Americans contribute to an HSA with retirement healthcare in mind.

For workers who qualify, ignoring the account can mean missing out on significant long-term savings.

How Section 223 delivers three tax advantages through one HSA

According to IRS Publication 969, contributions made through a cafeteria plan under IRC Section 125 avoid federal income tax as well as Social Security and Medicare taxes, and employer HSA contributions are excluded from income under Section 106(d).

People who contribute outside an employer plan can still claim the full deduction on Form 1040 without itemizing deductions.

The IRS also says earnings on HSA investments remain tax-free while the money stays in the account.

When withdrawals are used for qualified medical expenses, they are excluded from gross income under IRC Section 223(f)(1). That means the money can avoid tax at every stage. By contrast, traditional 401(k) withdrawals are taxed, while Roth IRA contributions are taxed instead. Neither matches the HSA’s complete exemption.

Steve Betts, head of Fidelity Health at Fidelity Investments, said the account should play a bigger role in long-term retirement planning.

HSAs are more than just a short-term savings tool, they can serve as a critical component of the retirement readiness equation,

The IRS set the HSA contribution limit at $4,400 for individual coverage and $8,750 for family coverage for 2026, according to Revenue Procedure 2025-19.

Workers age 55 and older can make an additional $1,000 catch-up contribution. That amount is fixed by law and does not rise with inflation, according to IRC Section 223(b)(3).

Why many eligible workers do not use the full HSA advantage

Fidelity’s data points to a wide gap between how the HSA is designed and how Americans actually use it during their highest-earning years.

Among workers ages 55 to 64, only 15% have an HSA, even though healthcare needs are likely to rise as retirement gets closer. More than half of the people Fidelity surveyed did not know the account can also serve as a retirement savings tool.

Morningstar’s 2025 HSA Landscape Report found that 73% of HSA users across 11 providers spend from the account rather than invest the balance.

That behavior eliminates the account’s second and third tax benefits, since money spent right away cannot grow over time and never produces a tax-free retirement withdrawal.

Fidelity estimates that a 65-year-old retiring in 2026 will spend an average of $185,500 on healthcare during retirement, up 7.5% from its 2025 estimate of $172,500.

People who use up their HSA balances on immediate costs arrive at age 65 without a reserve to help cover those larger medical expenses.

A couple’s HSA can help pay nearly 17 years of Medicare Part B premiums

A married couple with family high-deductible health plan coverage can contribute $8,750 a year, and a spouse age 55 or older can add a $1,000 catch-up contribution, bringing the total to $9,750. If the couple starts maxing out the HSA at age 58 and continues through age 64, they would contribute $68,250 over seven years on a tax-free basis.

With an assumed 6% average annual return on invested HSA funds, that balance could grow to about $82,000 by age 65, including $13,750 in tax-free gains.

The standard Medicare Part B premium reached $202.90 a month for 2026, up from $185.00 in 2025, according to the Centers for Medicare and Medicaid Services.

For a couple, that adds up to $4,869.60 a year. In that case, an $82,000 HSA balance could cover about 16.8 years of Part B premiums tax-free.

IRS Publication 969 says Medicare Part B premiums are eligible HSA expenses, and those withdrawals are not counted in the income test used for higher-income premium surcharges.

Withdrawals from a traditional IRA or 401(k) do count toward that threshold, which can add hundreds of dollars to monthly premiums for retirees above the income limit.

How workers with an HDHP can capture the full triple benefit

Fidelity says workers who currently use their HSA to pay everyday bills may want to switch to paying routine expenses out of pocket and leaving the HSA invested. That change can turn the account from a medical spending tool into a retirement asset that grows without annual tax drag.

For 2026, a health plan qualifies as an HDHP when the deductible reaches $1,700 for self-only coverage or $3,400 for family coverage, according to Revenue Procedure 2025-19. Catch-up contributions must go into a separate HSA in the worker’s own name, since the IRS does not allow those funds to be placed in a shared account, IRS Publication 969 says.

Only 3 in 10 Americans invest their HSAs, meaning most miss out on years of tax-free growth that could help offset rising retirement costs, Fidelity found.

Whether the HSA should come before or alongside 401(k) and IRA contributions depends on each household’s deductible, tax bracket, and retirement timeline.