The HSA in retirement: the triple tax break and how to use it

Most retirement accounts give you a tax break on one end: traditional accounts skip tax going in, Roth accounts skip it coming out. A health savings account, or HSA, can skip it at all three points. In retirement, when medical costs are one of the larger line items in a budget, that's worth understanding. Runway has an HSA account type on the Accounts step; here is what the account does, what it can pay for after 65, and how the planner currently treats it.

What are the three tax breaks?

IRS Publication 969 lists them. First, "You can claim a tax deduction for contributions you or someone other than your employer make to your HSA even if you don't itemize your deductions," and contributions made by your employer through a cafeteria plan may be excluded from your income. Second, the account's earnings are not taxed while they stay in it. Third, "Distributions may be tax free if you pay qualified medical expenses." The deduction is worth the most to people still working, in a high bracket: $4,400 deducted at 22% saves $968 of federal tax.

Who can contribute, and until when?

You must be covered by a high-deductible health plan (HDHP). For 2026 the contribution limits are $4,400 for self-only coverage and $8,750 for family coverage, and Publication 969 adds $1,000 if you're age 55 or older at the end of the year. The limits come from IRS Rev. Proc. 2025-19; the 2026 HDHP minimum deductibles are $1,700 (self-only) and $3,400 (family). The cutoff that matters for retirees is Medicare. Publication 969: "Beginning with the first month you are enrolled in Medicare, your contribution limit is zero." If you're still working at 65 with an HDHP, enrolling in Medicare Part A or B ends your ability to contribute, so people who want to keep funding an HSA time the Medicare sign-up around that rule. See the Medicare post for how enrollment works.

What can an HSA pay for in retirement?

Qualified medical expenses: doctor and hospital bills, prescriptions, dental, vision. The expenses that matter most to a retiree are insurance premiums, and Publication 969 allows an HSA to pay for "Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap)." That means Part B and Part D premiums qualify, and Medigap premiums don't. For a couple on Medicare in 2026, standard Part B alone is $4,870 a year ($202.90 a month each). Long-term-care insurance premiums also qualify, up to the age-based limits in the insurance payouts post: $4,960 in 2026 for ages 61 to 70 and $6,200 over 70.

What if I spend it on something else?

Publication 969: "If you don't use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution." Before 65 there's also "an additional 20% tax on the part of your distributions not used for qualified medical expenses," but "There is no additional tax on distributions made after the date you are disabled, reach age 65, or die." So after 65 the HSA's worst case is a traditional-IRA-like outcome: ordinary income tax, no penalty. That is why some people describe an HSA as a medical account that turns into a spare traditional IRA at 65.

How much does the tax-free withdrawal save?

Suppose $10,000 of medical bills come due in a year when you have other ordinary income already, such as a pension, taxable Social Security and IRA withdrawals. Paid from an HSA, you withdraw $10,000 and owe nothing. Paid from a traditional IRA, you have to withdraw more than $10,000, because the withdrawal is itself taxed. In Runway's engine, for a married couple filing jointly, both over 65:

The figure is slightly more than the bracket rate times $10,000, because the extra withdrawal is also taxed. It also ignores two further effects of a bigger income: more of your Social Security can become taxable, and a high enough income triggers a Medicare surcharge two years later. Those make the real saving larger for people near a line.

How does Runway use an HSA?

An HSA balance you enter on the Accounts step counts toward your total assets and grows with the same market returns as your other investments. It is drawn on for exactly two things, because those are the HSA-eligible costs in Runway's plan: Medicare premiums (Part B plus any income surcharge) once someone is 65, and the long-term-care episode if you've left it on. Each year, after Social Security, pensions and required distributions have covered what they can, the plan pays those costs from the HSA first, tax-free, and only then from cash, brokerage, traditional and Roth money. It never spends the HSA on anything else: ordinary spending from an HSA would be taxable income, which the plan doesn't do.

For the sample couple (Pat 65, Alex 64, $1.46 million) with a $100,000 HSA added, the HSA pays the first-year Medicare premium of $2,435 and $4,870 a year after, for the years in which the couple's other income hasn't already covered their spending; it pays $41,392 in premiums over the plan, and with the long-term-care episode on it pays about $68,000, $65,000 and $64,000 of the care costs at ages 92, 93 and 94. What the HSA doesn't spend keeps growing. The effect is largest where a plan is tight:

The median ending balance rises too, since whatever the HSA hasn't paid out is still there at the end: from $1,574,254 to $1,934,934 at $95,000 with no long-term-care episode. Part of that is simply the extra $100,000 of assets, so read the table as "what a plan with an HSA looks like," not as the HSA's tax saving alone.

What does this leave out?

• Only two uses. The HSA pays Medicare Part B premiums (and any income surcharge) and the long-term-care episode. Other qualified expenses, such as copays, dental, vision, Part D plan premiums and Medigap-adjacent costs, aren't in the plan, so the HSA is never drawn for them. (ACA marketplace premiums before 65 aren't HSA-eligible, so it doesn't pay those either.)
• The tax saving is implicit. The plan treats HSA payments as tax-free and pays the same costs from other accounts only once the HSA is empty, so its effect shows up in how long your other money lasts rather than as a separate line.
• Pre-65 premiums. This guide covers what an HSA can pay for after 65; it doesn't list every premium rule that applies earlier in retirement.
• State tax. Some states tax HSA contributions or earnings differently from the federal rules. Check yours.
• Investment choices inside the HSA (cash versus invested) vary by custodian and aren't modeled; Runway uses your plan's overall stock/bond mix.

How were these numbers computed?

The 2026 limits and the quotations come from IRS Publication 969, IRS Rev. Proc. 2025-19 and Rev. Proc. 2025-32 (the long-term-care premium limits). The tax table uses Runway's federal tax function: for each level of other ordinary income it finds the withdrawal that leaves exactly $10,000 after tax, married filing jointly with both spouses 65 or older and the 2026 standard deduction. The HSA test uses the sample household (Pat 65, Alex 64, plan through age 95, 60% stocks) with and without a $100,000 HSA added; the Monte Carlo figures use seed 2026 and 2,000 simulated paths, and the long-term-care rows add Runway's episode of $129,575 a year for three years from age 92.