3 Smart Ways to Maximize Your Roth IRA

By Markets Fool.com

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If you're actively investing in a Roth IRA, congratulations! You're already a step ahead of much of the American public when it comes to saving for retirement.

Now let's focus on getting the most out of your Roth IRA as you possibly can. Here are three strategies from our experts that can help you do just that.

Selena Maranjian
This may seem obvious to you, but many people ignore it: To get the most from your Roth IRA, you have to contribute as much money as possible. If you're simply checking near the end of the year to see how much money you have left over for your IRA after all your holiday spending is done, that doesn't bode well for your financial future. Sure, contributing $1,000 or even $3,000 to your IRA can help build a nest egg for retirement. But you can build a much bigger one by maxing out your contributions.

There's a contribution limit for IRAs (both Roth and traditional) for each year. For 2014 and 2015, it's $5,500 for most folks and $6,500 for those aged 50 or older. Potential contributions are phased out at relatively high income levels, but for most of us, those limits hold.

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Here's a rough idea of how significant seemingly small differences can end up being: If you contribute $4,500 every year for 25 years to an IRA and it grows at 10% annually, you'll end up with nearly $487,000. Nice, eh? But if you contribute $5,500 annually and it all grows at 10% per year, the end result will be $595,000 -- a difference of $108,000! Of course, as the annual limit rises each year, you should aim to max it out, and then your grand total will be even larger.

Finally, don't skip years. It's easy to think you've blown it once January rolls around and you haven't made your contribution for the year that just ended, but you actually have until the tax return deadline -- April 15 of the following year -- to make your contribution for the past tax year. (Just be sure to specify which year it's for when you make your contribution.) Skipping just one year can seriously lower your eventual nest egg. Remember that $595,000 total above? Well, if you made those $5,500 annual contributions for just 24 years instead of 25, you'd end up with $535,000 -- about $60,000 less!

Dan Caplinger
Following up on Selena's point, another key to getting as much money as possible into a Roth IRA is using your ability to convert existing traditional IRA and 401(k) assets to your Roth. Although there's a modest $5,500 annual limit on Roth contributions, there's no dollar limit on the amount you can get into your Roth through a conversion. Moreover, the income restrictions that once limited Roth conversions are gone, so retirement savers of all income levels can enjoy the benefits of stashing money in a Roth IRA.

The only thing to keep in mind is that money you convert from a traditional IRA or 401(k) to a Roth will be included as taxable income on your tax return in the year of the conversion. That can add a huge amount of tax liability, so it's important to plan accordingly so as not to get blindsided by a big IRS bill. Nevertheless, many people will pay less in taxes by converting now than they would pay by keeping money in a traditional IRA and then paying taxes on the amount they withdraw in retirement. If you truly want to max out your Roth assets, don't ignore conversions; they can make a huge difference.

Matt Frankel
Selena is 100% right: If you don't put enough money into your account, you won't achieve your goals no matter how well the market does.

Once you've decided to max out your contributions, the next way to maximize your Roth IRA is to focus on the right kind of stocks. The best kinds of stocks to buy for your Roth IRA are high-quality dividend growth stocks, and a great way to start your search is by looking into the past.

A group of stocks called the dividend aristocrats have increased their dividends for at least 25 consecutive years. In addition to creating a growing stream of income, many stocks on this list are recession-resistant and deliver some of the best long-term performance in the market.

Two of my favorite names in this group are Procter & Gamble and Johnson & Johnson , which have increased their dividends for 58 and 52 years, respectively. And both of these companies have handily beat the S&P 500's performance over the past 20 years.

Some REITs make excellent IRA investments as well, especially those that invest in commercial properties, like Realty Income . This company pays an annual dividend yield of 4.5% and has increased its monthly payout 78 times in its 20-year history as a public company. The stock's average total return of 16.4% per year is particularly impressive when you consider that this 20-year period included one of the worst real estate crashes in history.

JNJ Total Return Price Chart

To sum it up, the best way to maximize your Roth IRA is to make sure your hard-earned contributions are invested in the right kind of stocks.

The article 3 Smart Ways to Maximize Your Roth IRA originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. Matthew Frankel owns shares of Realty Income. Selena Maranjian owns shares of Johnson & Johnson and Procter & Gamble. The Motley Fool recommends Johnson & Johnson and Procter & Gamble and owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.