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A Roth IRA is a powerful retirement savings tool, because if you play by the rules, you can withdraw funds from it in retirement tax-free! If you amass an account worth $250,000 in retirement, for example, and your other retirement income puts you in a 25% tax bracket then, you may be able to use your Roth to avoid $62,500 in taxes. That's money that can go a long way toward supporting the lifestyle you want.

Here are three smart ways to maximize the benefit you get your Roth IRA.

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1. Contribute the maximum

Selena Maranjian: One of the most powerful ways to maximize your Roth IRA is to make the maximum  allowable contribution to it each year. The limit gets adjusted over time to keep up with inflation: For 2016, it's $5,500 -- plus an extra $1,000 for those 50 or older. That might not seem like a princely sum, but it will probably be able to generate more wealth than you expect.

In the table below, for example, you can see how much money profit you can accumulate with annual $5,500 contributions at different average annual rates of growth:

Growing for

Growing at 8%

Growing at 10%

Growing at 12%

15 years




20 years




25 years




30 years



$1.5 million

The table drives home two important lessons: how powerful the effect of time is, and how much of a difference the growth rate makes. You can't completely control these two factors. If you're 50 and starting to save for retirement, you're not going be able to let the vast majority of your money grow for decades. (Note, though, that even if you're 50, some of your money will be growing for decades -- you're not going to withdraw it all early in retirement, and you may live to 90 or beyond!) Also, growth rates are not guaranteed in the stock market -- nor even in the bond market, unless you're buying bonds and holding them until they mature. Still, over many decades the stock market has averaged an annual return close to 10%, so it's a rate you can hope for with long-term investments in the overall market. And if you're a talented or lucky selector of individual stocks and/or funds, you may enjoy above-average annual returns.

Clearly, though, the more you contribute, the more you can accumulate. The table above assumes $5,500 annual contributions, but the maximum will likely be rising over the years, and once you hit 50, you can start contributing even more.

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Dividends can turbocharge your portfolio's growth. Image source: Getty Images

2. Favor dividend stocks

Matt Frankel: The No. 1 reason to use retirement accounts such as a Roth IRA is for the tax advantages they offer. And the best way to capitalize on the tax advantages is to fill your portfolio with high-quality dividend-paying stocks.

My personal favorite type of stocks to hold in my own Roth IRA are real estate investment trusts (REITs), which are already inherently tax-advantaged. Specifically, as long as REITs pay out more than 90% of their net income to shareholders, their profits are not taxed at the corporate level. This is the main reason REITs tend to pay higher dividends than most other types of stocks.

The catch is that if they're held in a taxable brokerage account, much of your REIT dividends can be taxed as ordinary income, and not at the favorable "qualified dividend" rates of most stocks.

Of course, in a Roth IRA, your dividends won't be taxed at all. So, by holding these stocks in your Roth IRA, you are avoiding taxation at both the corporate and personal levels -- something you can't do with most other types of dividend stocks.

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The benefit of converting an IRA may be worth the cost. Image source: Getty Images

3. Convert a Traditional IRA into a Roth IRA

Brian Feroldi: The flexibility and tax advantages offered by Roth IRAs make them too good of a deal to pass up, so consider making it a priority to max out your contributions to your Roth IRA each year.

Unfortunately, if your income exceeds the limits -- which for 2016 are $132,000 if you are single and $194,000 for married couples -- then you cannot contribute directly to a Roth IRA.

Fortunately, even if your income is above these thresholds, you're not completely out of luck. In 2010, Congress tweaked the contribution rules slightly, opening up a new option for high-income earners -- a technique called a "backdoor Roth IRA conversion."

It's a simple two-step process that goes like this: First, contribute to a traditional IRA. Then, convert the traditional IRA balance into a Roth IRA. Since there are no income limits on contributing to a traditional IRA, this method allows high-income folks to sidestep the Roth IRA income limits.

Of course, this strategy does have a few drawbacks. First, you'll have to pay taxes on the amount you convert. Two, you will have to file some additional paperwork at tax time.

Still, these are small prices to pay for gaining the tax advantages and flexibility that Roth IRAs offer. If you agree, then you might want to dig into the details of executing this strategy to see if it makes sense for you.

For a comfortable retirement, it's smart to contribute as much as possible to a Roth IRA, to invest in high-quality dividend-paying stocks, and to consider converting a Traditional IRA to a Roth, if that makes sense for you. 

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