The One IRS Account That Can Escape Taxation Three Times

The IRS taxes most retirement accounts at least once, either when money goes in or when it comes out. But one little-known account avoids all three of the usual tax moments, and many people who can use it never take full advantage of it.

Most tax breaks only let you dodge one of the three times money is typically taxed. A traditional 401(k) skips tax on the way in and is taxed on the way out. A Roth IRA does the reverse. One account avoids tax at all three stages: contribution, growth, and withdrawal.

That account is the health savings account, or HSA, created under Section 223 of the Internal Revenue Code. HSAs have allowed contributions since 2004. For example, a married couple in the 22% bracket who maxed out an HSA each year from age 58 through 65 could build roughly $82,000 that never gets taxed, so long as the money is used for qualified medical care.

How Section 223 Helps Money Avoid Tax Three Times

On the way in: Contributions can be deducted, or excluded from income if an employer contributes under section 106(d). Payroll contributions also avoid Social Security and Medicare taxes. By contrast, your own 401(k) deferrals do not get that treatment because the law still counts them as “wages.”

While it grows: Interest, dividends, and capital gains inside the account are not taxed, and the account does not send out a yearly 1099.

On the way out: The law says money “used exclusively to pay qualified medical expenses” is “not includible in gross income.” A Roth offers a similar tax-free withdrawal under § 408A(d)(1), but it is funded with money that has already been taxed.

You must have a qualifying high-deductible health plan to contribute. Starting in 2026, bronze and catastrophic plans are treated as eligible under the One Big Beautiful Bill, and Notice 2026-05 says those plans do not have to be purchased through an Exchange.

A 58-Year-Old Could Build an $82,000 Tax-Free Pool

Assume a married couple files jointly with family HDHP coverage and the older spouse is 58. Their taxable income is above $100,800, placing their highest dollars in the 22% bracket. The 2026 family contribution limit is $8,750. Anyone age 55 or older can also add a $1,000 catch-up contribution, which is not indexed for inflation and must go into that spouse’s own HSA.

Pulling that same $81,840 from a pretax retirement account in the 22% bracket would create about $18,005 in federal tax. State treatment is different: California and New Jersey tax HSA contributions at the state level, and state rules vary widely, so it is wise to check with a CPA.

Medicare Ends Contributions and Can Turn the HSA Into a Payback Tool

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

That is where the account becomes especially useful. 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 would cover about 16.8 years of both spouses’ premiums.

Those withdrawals also stay out of the income figure Medicare uses for IRMAA surcharges. IRA withdrawals do count. Joint filers with income above $218,000 pay $284.10 a month each for Part B rather than $202.90. IRMAA is one of several premium traps that can surprise retirees, and the rest are covered in a free Medicare guide.

Once you reach Medicare age, the 20% penalty on non-medical withdrawals disappears under § 223(f)(4)(C). The money would still be taxed as ordinary income, so in the worst case the HSA functions like any pretax retirement account.

Non-Spouse Heirs Inherit a Tax Bill

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

That creates three practical moves:

1. Invest the balance rather than leaving it in cash, and pay current medical bills out of pocket while you are still working.
2. Keep your receipts. You can reimburse yourself years later for expenses incurred after the HSA was opened [See  Pub. 969 reimbursement timing details].
3. Use the HSA before the Roth later in life, so heirs can receive the Roth tax-free instead of a fully taxable HSA.

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