HSA Withdrawals Cut Social Security Taxes and Medicare Surcharges

Retirees can lower the taxation of their Social Security benefits by up to 85% by using Health Savings Account withdrawals for medical expenses instead of 401(k) withdrawals. HSA withdrawals for qualified medical expenses do not count toward provisional income, the IRS measure used to determine Social Security taxation. Traditional 401(k) withdrawals increase adjusted gross income and provisional income. Once provisional income for joint filers exceeds $44,000, up to 85% of Social Security benefits become taxable.

This shift in funding source reduces modified adjusted gross income, which determines Medicare premium surcharges. The 2026 IRMAA thresholds start at $109,000 for single filers and $218,000 for joint filers. A married couple whose modified adjusted gross income falls into Tier 2, between $274,001 and $342,000, pays roughly $2,500 per person annually in combined Part B and Part D surcharges. Routing healthcare costs through the HSA can keep a couple below a surcharge tier, avoiding nearly $5,000 per year per couple in premiums.

These benefits are accessible to those with family coverage under a high-deductible health plan. In 2026, eligible individuals can contribute $8,750 to an HSA, and those 55 and older can add a $1,000 catch-up contribution. Contributions are deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. A strategy to maximize this involves paying current medical expenses out of pocket and saving receipts. Because there is no time limit on HSA reimbursements, saved receipts allow the HSA balance to compound tax-free until retirement, effectively turning the account into a tax-free cash account.