Ear tubes, and a bill that kept coming
A couple of years ago our daughter had ear tubes put in at CHOP (shoutout, again, to the phenomenal folks there). The procedure went off without a hitch. The bills kept rolling in for a while after.
I was glad I’d spent years beefing up my HSA. With open enrollment season coming up for a lot of employers, it’s worth asking: what makes this account so useful, and is it only for medical bills?
Short answer: it’s a health account that can quietly double as a retirement account.
What is an HSA?
A Health Savings Account is a tax-advantaged account that pairs with a high-deductible health plan (HDHP).
- Who qualifies: You need to be covered by an HDHP, have no other disqualifying health coverage, not be enrolled in Medicare, and not be claimed as someone else’s dependent.
- What counts as an HDHP for 2026: A deductible of at least $1,700 (self-only) or $3,400 (family), and out-of-pocket costs capped at $8,500 or $17,000.
- New for 2026: Bronze and catastrophic plans now count as HSA-compatible, and a direct primary care arrangement no longer knocks you out.
- Contribution limits: $4,400 (self-only) or $8,750 (family) for 2026, rising to $4,500 and $9,000 for 2027. If you’re 55 or older, you can add $1,000.
What is the “triple tax advantage”?
Money goes in tax-free, grows tax-free, and comes out tax-free when it’s used for qualified medical expenses.
- Going in: Contributions are deductible, or excluded from your income if they come through payroll, which generally skips payroll taxes too.
- Growing: Interest and investment earnings aren’t taxed.
- Coming out: Withdrawals for qualified medical expenses are tax-free.
The New Jersey catch. New Jersey doesn’t follow the federal rules, so these breaks don’t apply to your state income tax. A bill to change that is sitting in committee in Trenton. Pennsylvania does follow the federal rules for contributions, so PA residents can deduct them up to the federal limits.
How can an HSA double as a retirement account?
Two features do the heavy lifting.
The penalty goes away at 65. Before 65, a withdrawal for something other than medical costs is taxed as income, plus a 20% penalty. After 65, it’s just taxed as income, the same as a traditional IRA. Medical withdrawals stay tax-free at any age, and that includes Medicare Part B, Part D, and Medicare Advantage premiums (not Medigap). You also don’t have to take money out each year.
The shoebox. You can pay a medical bill out of pocket today, save the receipt, and reimburse yourself from the HSA years later, tax-free. The expense has to come after you opened the HSA, and you need records to back it up, but the IRS doesn’t set a deadline.
Say you pay a $3,000 medical bill out of pocket this year, save the receipt, and leave the $3,000 invested in your HSA. Years from now, you can pay yourself back that $3,000 tax-free, and whatever the money earned in the meantime was never taxed along the way.
Why does that matter? Fidelity estimates that a 65-year-old retiring in 2026 can expect to spend an average of $185,500 on health care in retirement. Yet only about 10% of HSAs had any money invested at the end of 2025. Most just sit in cash.
One timing note: once you enroll in Medicare, you can’t contribute anymore, and Part A coverage can start up to six months before you sign up. Medicare’s own advice is to stop HSA contributions six months before you retire or apply for Social Security.
Where that leaves you
Whether an HSA fits comes down to what you want the money to do: cover this year’s bills, build a cushion for health costs in retirement, or both. That depends on your health plan options, how your family uses care, your state (hello, New Jersey), and what else you’re saving for, and that’s where we can actually help.
If you’re weighing your options this open enrollment, you know where to find me.
Sources
- 2026 HSA limits and HDHP thresholds: IRS, Rev. Proc. 2025-19
- 2027 HSA limits: IRS, Rev. Proc. 2026-24
- Eligibility, $1,000 catch-up, tax treatment, 20% penalty before 65, reimbursing past expenses, Medicare contribution rules, Medigap exclusion: IRS, Publication 969, “Health Savings Accounts and Other Tax-Favored Health Plans”
- Bronze/catastrophic plans and direct primary care (One Big Beautiful Bill Act): IRS, “Treasury, IRS provide guidance on new tax benefits for health savings account participants under the One Big Beautiful Bill”
- Medicare premiums payable from an HSA: Fidelity, “HSAs and Medicare”
- Stopping contributions six months before retiring or applying for Social Security: Medicare.gov, “Working past 65”
- Part A starting up to six months back: Medicare.gov, “When does Medicare coverage start?”
- New Jersey doesn’t follow federal HSA tax treatment: New Jersey Legislature, Assembly Bill A1311
- Pennsylvania HSA contribution deduction: Pennsylvania Department of Revenue, “PA Personal Income Tax Guide – Deductions and Credits”
- $185,500 retiree health care estimate: Fidelity, 2026 Retiree Health Care Cost Estimate
- About 10% of HSA accounts invested: Devenir, “2025 Year-End Devenir HSA Research Report
The views presented herein are solely those of Rory Banks and do not necessarily represent the views of RBC Wealth Management. The current status of issues discussed in this article is subject to change based on market conditions and industry fundamentals. Clients should work with their Financial Advisor to develop investment strategies tailored to their own financial circumstances. Past performance is no guarantee of future results.