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Never too soon or too late to start a retirement account

As 2015 winds to a close, you still have time to make one of the most important financial decisions of your life:

Open an Individual Retirement Account and make a contribution, this year and every year.

Why an IRA and why now? An IRA is an account you own that allows you to make annual contributions for your retirement. I'm a fan of IRAs because they are high yielding savings accounts with a significant tax advantage. And it's always a good idea to save for our non-earning retirement years.

But the tax-advantaged part of an IRA is what makes it particularly attractive. An IRA allows you to put income into the account and watch it grow, tax-free, for years. You pay taxes on the funds only when you spend them, usually in your lower-earning retirement years, when most people's tax rates are lower.

Another form of IRA, called a Roth IRA, allows you to do the opposite: pay taxes on the contributions up front and then withdraw them tax-free in retirement. But in this case also, the earnings on your Roth IRA grow tax-free during those intervening years.

Which IRA is right for you? A conversation with your community banker and/or your tax adviser is the best way to determine that. But I can say this with certainty: when you start while you are younger, the arithmetic of compounding interest is far more advantageous to saving for retirement.

Why open an IRA now? The end of the year is the deadline for opening an account and qualifying for an IRA deposit in 2015. The U.S. Internal Revenue Service allows you to make that contribution as late as April 18, 2016, the deadline for filing 2015 tax returns (yes, we get three extra days this tax season). But you have to open an account by Dec. 31 to qualify for a contribution. That's why you should consider acting now.

Opening an account before the end of the year allows you to get a head start on your retirement savings by making your first year's contribution for 2015. One year early means you're one year closer to a more secure retirement, and you earn interest for a year longer. It all adds up.

How much can you contribute to your IRA? Each year, the IRS announces the maximum contribution for all Americans. For 2015, the limit is $5,500 per individual. Those 50 and older also can contribute an additional $1,000 a year as part of what the IRS calls a "catch-up" provision, designed to help people who are closer to retirement save a little more.

Once you open an IRA, you can place the funds in a broad array of investments. IRAs in your community bank are insured by the Federal Deposit Insurance Corp. But no matter how you invest, the important part is to get started now by opening an account.

I suggest opening an IRA to almost everyone. On my list of basics to ensure a sound personal financial future, saving for retirement is right up there with setting (and living by) a budget and avoiding high-interest credit card debt. Some banks will even lend you the money for your IRA deposit.

There are, however, some people for whom an IRA might not be the best choice. If you work for an employer that offers a qualifying retirement program, usually a 401(k), it might be better for you to save that way. That's especially the case if your employer offers matching funds if you contribute at or above a certain level. Tax-free money from your employer is always a good idea.

But even if you are covered by a 401(k), you may one day want to work for yourself or find yourself at a company that does not offer such a benefit. Having your own IRA can be a resource even if you don't intend to rely on it now. When employees make career moves, they frequently transfer funds from their work 401(k) accounts to their IRAs.

IRAs are pretty straightforward, but how such an account would work for you is best determined in a conversation with your community banker and your tax adviser. So pick up the phone or stop in to have a quick talk.

The year is winding down, but you still have time to make one of the best financial decisions of your life.

Dale Lewis is president and CEO of Park State Bank in Duluth. You can reach her at president@parkstatebank.com or (218) 722-3500.

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