The One Account the IRS Allows to Avoid Tax Three Times

Quick Read

• HSAs avoid taxes at three stages: contributions are deductible, investment gains are never taxed, and qualifying medical withdrawals are excluded from gross income.

• A couple putting in $9,750 a year from age 58 through 65 can build $81,840 tax-free. Pulling the same amount from a pretax account would trigger $18,005 in federal taxes.

• Anyone other than a spouse who inherits an HSA must include the full balance as taxable income in the year the owner dies, which makes it a poor asset to leave to heirs.

Most tax breaks let you dodge tax only once or twice. A traditional 401(k) defers tax on contributions and collects it later when you withdraw. A Roth IRA does the reverse. An HSA is different because it can escape taxation at the deposit, growth, and withdrawal stages.

How Section 223 Lets Money Avoid Tax Three Times

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To contribute, you need a qualifying high-deductible health plan. Under the One Big Beautiful Bill, bronze and catastrophic plans are treated as eligible starting in 2026, and Notice 2026-05 says they do not have to be purchased through an Exchange.

Doing the Math on an 58-Year-Old's Tax-Free Fund

Consider a married couple filing jointly with family HDHP coverage and an older spouse who is 58. Their taxable income is above $100,800, placing their top dollars in the 22% bracket. The family contribution cap is $8,750, and anyone age 55 or older may add a $1,000 catch-up contribution, which is not inflation-indexed and must go into that spouse’s own HSA.

Withdrawing that same $81,840 from a pretax retirement account while in the 22% bracket would cost about $18,005 in federal tax. State treatment is not uniform: California and New Jersey tax HSA contributions at the state level. Because rules differ from state to state, it is wise to check with a CPA.

Medicare Ends Contributions, Then Can Benefit You

Your contribution limit falls to zero starting with the first month you are entitled to Medicare. There is a catch if you enroll after 65: Part A coverage generally reaches back as far as six months, so contributions should stop before that retroactive period begins or you could owe excise tax on excess amounts.

The advantage comes when you spend the money. Medicare Part B premiums count as qualified medical expenses [See Pub. 969, Medicare premiums for details]. In 2026, the standard premium is $202.90 a month, or $4,869.60 a year for a couple. At that pace, the $81,840 balance would cover roughly 16.8 years of both spouses’ premiums.

Those withdrawals also stay out of the income used to calculate IRMAA surcharges. IRA withdrawals do count. Joint filers with income above $218,000 pay $284.10 a month each for Part B instead of $202.90. IRMAA is one of several premium surprises that can affect retirees, and the rest are covered in a free Medicare guide.

Once you reach Medicare age, the 20% penalty on non-medical withdrawals no longer applies under § 223(f)(4)(C). The distribution is still taxed as ordinary income, so at worst the HSA functions like any other pretax retirement account.

Non-Spouse Heirs Get the Full Tax Hit

A surviving spouse who inherits an HSA simply takes it over as their own. For everyone else, the account “shall cease to be a health savings account as of the date of death,” and the entire balance is included in the heir’s income that year. The only offset is the deceased owner’s final medical bills, if the heir pays them within one year.

That creates three planning moves:

It is worth discussing when to stop contributing and which account to spend down first with a CPA or fee-only fiduciary before enrolling in Medicare.

Learn 7 Ways To Generate Income With A $1,000,000+ Portfolio

If you’ve saved over $1,000,000, this guide is for you. The last thing you want in retirement is to run out of money, you want your money to generate lasting income while you enjoy your life.

Now you can learn the strategies wealthy retirees use to fund their retirement with The Definitive Guide to Retirement Income from Fisher Investments. Download the guide today! (sponsor)