By Dr. David Eifrig, editor, Retirement Trader (Daily Wealth | Original Link)
One of the joys of investing is watching your money grow…
If you make sure your money is always growing, it can mean the difference between having a comfortable retirement and just scraping by.
In August 2011, I told readers about the world’s greatest money-growing strategy. I called it “the easiest way to make $1 million in the stock market.”
In that essay and a follow-up, I described how my sister began building her wealth early in life… adding to her savings regularly and reinvesting her dividends and cash distributions. My dad waited until he was older, but followed this strategy as well.
With modest amounts of money invested, they used a strategy that can turn almost anyone into a millionaire. That’s impressive… But there’s a real secret to making the most of this strategy…
The strategy is compounding. Simply stated, compound returns are money you make off the money you make. So if you invest $1,000 for a 10% return, you make $100 and end up with $1,100. If you invest $1,100 of money for a 10% return, you make $110 and end up with $1,210. That extra $10 was money you made on the money you made.
It starts small like that. But over time, your wealth grows like kudzu when you compound your money. And the best way to compound your money is to do it in a tax-sheltered investment account… like an Individual Retirement Arrangement (IRA).
Getting money into an IRA allows compounding of returns, without the government shaving off any of the principal.
Many people first open their IRA account using a savings account or a certificate of deposit (CD). But today, with savings accounts and CDs yielding less than 1%… you’re not getting much “compounding power” for your money by doing that.
A typical IRA is managed by the brokerage you hire and limits you to conventional investment choices. Other people have IRAs through a brokerage account. This allows you to invest in stocks, bonds, and options… and is what I recommend. The best way to manage your IRA is through a self-directed IRA…
A self-directed IRA is exactly what it sounds like… It puts you in charge of what you invest in. I use my self-directed IRA to generate 15%-20% in annual income by selling stock options. Over time, that kind of return can compound $10,000 into millions.
And when I use this account for options trading, I have no accounting or tax requirements to follow. I don’t have to spend much time during tax season figuring out short- and long-term gains on my option buys and sells.
If you do all your trading inside a retirement account, you won’t have to report any trades to the IRS. And you’ll be able to use the compounding strategy to maximum effect.
Over 30 years, the tax-deferred account would be worth $996,964.10, while the taxed account would be worth $791,346.60. That’s more than $200,000 extra just by avoiding taxes.
The difference between compounding without paying taxes and paying taxes along the way can be seen in the chart below:
The difference starts out pretty small. But it grows fast. Even if you’re starting at the age of 40, getting the tax man out of your retirement account increases your returns by more than 25%.
If you want to take advantage of the compounding strategy – and if you want to retire rich, you should – this is the way to do it.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig
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