You ever shell out cash for something and only fully realize how bad of a deal it is once you’re away from the situation? For example, maybe you’ve been to Chuck E. Cheese lately. I put out $30 so my kids can play arcade games while a giant mouse dances around the room. But my kids don’t care about the games; they just care about the tickets so they can get some prizes. We’ve been there dozens of times and they still haven’t figured out that they get four tickets each game no matter what they do. In fact, the skeeball machine just gave up trying to pretend and gives you the tickets before you start playing. Finally, after an hour of torture, they are ready to trade in those tickets. For my kids, this is seemingly the biggest decision of their lives. I don’t think they would put in as much mental effort if they had to decide whether to live with Mommy or Daddy.

I’ve done the math and the ticket counter at Chuck E. Cheese definitely has the worst exchange rate in the global market. How is it that my $30 turned into a plastic frog, a bookmark (my kids don’t even use bookmarks) and a tattoo of a mouse? But to be fair, if you really save up those tickets a few times, you could afford some vampire fangs as well.

Well, the same thing goes for your retirement funds. Are you getting the most bang for your buck when you set aside funds for retirement? Most people just default to a traditional IRA, but is this always the best way to go? Maybe not.

You probably just think of a Health Savings Account (HSA) as simply an account to put aside money for medical expenses. After all, the name is Health Savings Account, so what else would it be for?

This article may have you looking at HSAs in a completely different light. The HSA is the Swiss Army knife of savings accounts. Not only does it provide big benefits for medical expenses, but it is also a powerful tool to supplement your retirement savings. In fact, you will probably benefit more by putting money aside in an HSA rather than a traditional IRA.

We’re going to compare three aspects of the HSA and traditional IRA to see which one wins. While there are other considerations, feel free to contact me with any questions at [email protected].

First you need to qualify for an HSA. To contribute to an HSA, you must have a high-deductible health plan. For 2017, a high-deductible health plan is a plan with an annual deductible of at least $1,300 for self-only coverage, or at least $2,600 for family coverage. Additionally, the maximum annual out-of-pocket expenses they require you to pay are $6,550 for self-only coverage, and $13,100 for family coverage.

The HSA and traditional IRA are similar in that you may qualify for a tax deduction when you contribute. But to qualify for the IRA deduction, you have to meet the following requirements: (1) you (and your spouse, if applicable) are not covered by an employer retirement plan, or

(2) if you are eligible for an employer retirement plan, then your modified adjusted gross income must not exceed $62,000 ($99,000 for joint filers) before the phase-out begins.

So, you lose your tax deduction for IRA contributions if you are either eligible for a retirement plan at work or make too much money.

In contrast to the traditional IRA, your tax deduction for HSA contributions is never phased out. It doesn’t matter if you earn $10 million; you always get this deduction. You fund the HSA tax-free whether you use pre-tax dollars from your paycheck to contribute or deduct the contributions on your tax return.

But here’s the biggest advantage with the HSA—you may never pay taxes on the amount you withdraw. See, with an IRA, you get a deduction when you contribute, but you pay taxes on the back end when you withdraw funds upon retirement.

With an HSA, you can withdraw funds at any time tax-free to use for qualified medical expenses. When you reach Medicare-eligibility age (currently age 65), you can even use the HSA funds to cover your health insurance premiums, including Medicare Part B premiums and long-term care insurance premiums.

Additionally, if you are 65 or older, you can even withdraw HSA funds for non-medical expenses with zero penalty, and only pay income tax on the withdrawals.

So the HSA gives you a double tax benefit. You get a deduction when you contribute (benefit number one). Then when you use the funds for medical expenses or qualified health insurance premiums, it’s tax free (benefit number two). Don’t forget the added benefit of these funds growing tax-free over years of investing.

Tax deduction going in, tax-free coming out!

With an HSA, you can withdraw funds at any time, tax free, to use for qualified medical expenses. When you reach Medicare-eligibility age (age 65), you qualify for an added benefit because you can use the HSA funds to cover your health insurance premiums, including Medicare Part B premiums and long-term care insurance premiums. These expenses are inevitable, so why not pay them with tax-free cash?

That’s not the case with an IRA. As soon as you turn 70 1/2, the IRS requires you to start taking some money out of your IRA accounts so they can start charging you tax on that income. You may know this as required minimum distributions (RMDs).

Many people are looking to increase their retirement funds. Maybe you’ve maxed out your 401(k) contributions at work and wish you could put away more. Before you automatically assume that a traditional IRA is the only choice, you may want to see if the HSA gives you the boost you need.

By Daniel Magence, CPA, Esq.

 Daniel Magence, CPA, Esq. is a principal at Pristine CPA Solutions, LLC (www.pristinecpa.com). Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes, whether its tax returns, bookkeeping, payroll services or personal income budgeting. Daniel can be reached at [email protected] or 201-326-6908 if you have any questions or comments, or are interested in using Pristine CPA’s services. Feel free to contact us for a free consultation.