An HSA Is the Only Account With a Triple Tax Break. Here’s How to Use It After 65

Most retirement accounts give you one tax break, maybe two. A health savings account gives you three. Contributions go in deductible, growth compounds untaxed, and withdrawals for medical bills come out tax-free. At 65, the rules loosen further, and many account owners never hear about it.

The law behind all of this is Section §223 of the Internal Revenue Code. One clause in it, §223(f)(4)(C), drops the penalty on nonmedical withdrawals once you reach Medicare age. Below is how to turn that into real money, including a move that can cut a typical couple’s federal tax bill by more than $1,300 a year.

Section 223 Stacks Three Tax Breaks in One Account

A traditional IRA taxes the money when it comes out. A Roth taxes it before it goes in. An HSA skips tax at both ends when you spend the money on medical care.

Under the law, an HSA “is exempt from taxation” while it remains an HSA, and money “used exclusively to pay qualified medical expenses” is excluded from gross income. The IRS confirms that earnings on amounts in an HSA aren’t included in your income while held in the HSA and as long as the distributions are qualified distributions.

Age 65 Turns Your HSA Into a Backup IRA

Before 65, a withdrawal for anything other than medical care gets taxed as ordinary income plus an additional 20% tax. Take $10,000 for a new roof while you’re in the 22% bracket and you owe $4,200.

After 65, the IRS says there is no additional tax on distributions made after the date you are disabled, reach age 65, or die. That same $10,000 cap now faces only ordinary income tax, the same as a traditional IRA withdrawal. Medical withdrawals remains fully tax-free.

Many HSAs park balances in cash by default, and cash pays little. The national average 12-month CD rate was at 1.76% as of October 1, 2026, while the 10-year Treasury yielded 5.15%. Money you won’t need for years can be invested inside the account.

Paying Medicare Premiums From an HSA Beats Using IRA Money

Here’s where the 65-and-over rules pay off. Once you’re 65, Medicare and other health care coverage premiums count as qualified expenses. Part B, Part D and Medicare Advantage premiums generally qualify. Medigap premiums are excluded.

Consider an example married couple, both 67, filing jointly in 2026. Their taxable income puts them in the 22% bracket, which covers joint income over $100,800. Each pays the standard 2026 Part B premium of $202.90 a month.

Paying from the HSA saves about $1,373 a year in their pocket, and that’s before state income tax.

Tax-Free Withdrawals Keep You Under the IRMAA Cliff

Qualified HSA withdrawals never show up in gross income, so they don’t raise the modified adjusted gross income Medicare uses to set surcharges. That matters because those surcharges work like a cliff.

For 2026, joint filers with MAGI greater than $218,000 see each Part B premium jump from $202.90 to $284.10 a month, plus a $14.50 Part D surcharge. One dollar over the line costs our couple $2,296.80 for the year. Medicare looks back two years, so this year’s income sets the premium you’ll pay two years from now.

Covering a big dental bill or a hearing aid from the HSA instead of the IRA saves that income off your return. One warning: nonmedical HSA withdrawals after 65 count as taxable income, so they push you toward the threshold just like IRA money does. IRMAA is only one of several Medicare surprises that hit retirees who cross the wrong income line, and we mapped out the rest in a free guide to Medicare’s hidden bills.

Three HSA Mistakes After 65 That Cost Real Money

1. Contributing after Medicare starts. Beginning with the first month you are enrolled in Medicare, your contribution limit is zero, and that includes backdated coverage. Medicare.gov says Part A starts 6 months back from when you sign up or apply for Social Security. To be safe, stop contributing six months before you enroll.
2. Naming the wrong beneficiary. A spouse beneficiary simply takes over the HSA as their own. If anyone else inherits it, the fair market value of the HSA becomes taxable to the beneficiary in the year in which you die. If your heirs are likely to be in high brackets, spending the HSA down on your own care first usually makes sense.
3. Tossing receipts. You can reimburse yourself later for qualified expenses paid after you opened the account, but you have to saves records showing the distributions were exclusively to pay qualified medical expenses. You also can’t deduct the same bills on Schedule A.

State taxes can change the math. Some states don’t follow the federal HSA rules, so their residents may owe state tax on contributions and earnings.

Deciding which bills to pay from the HSA, which from the IRA, and how close to sit to the IRMAA line is worth working through with a fiduciary advisor or CPA.

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