When asked, Albert Einstein stated that the most powerful force in the universe was compound interest; nuclear reaction – no; compound interest – yes. And if you tried this experiment as a kid you would quickly realize just what he was stating. Simply take a calculator and start with one penny; now double that penny 30 times. The final number is astounding — over 10 million dollars. Now, let’s play the same game but factor in the influence of the bureaucratic system. After you double the number, subtract 40% to represent taxes on the gain. The new number, after the same 30 days, will result in just over $65,000. That’s right 10M or 65K; which would you prefer?
You should now understand why deferred tax retirement programs are so important to growing your nest egg. Your investments are able to grow tax free and only when the funds are pulled out are they taxed. You are taking advantage of the most powerful force in the universe. As such, you should always max out your deferred tax programs when possible.
So, you’re saying, “Dave, what does all this have to do with precious timber? ” Well, it’s really quite simple when you consider the process of planting, harvesting and selling a tree. You plant the tree knowing that, with care as a sapling, the tree will get larger each and every year. At the same time, inflation makes that tree more valuable each and every year. Unlike a savings account, or another passive income investment, there is no tax on the tree each year that it grows. In fact, there is no tax until you actually harvest and sell the tree. And even then, it’s taxed as a passive income investment.
In actuality, your tree is effectively an IRA. It grows, tax free, year after year until it’s harvested. Who decides when it’s harvested? You do. Who decides when to take the income? You do. You are in control of when the trees are sold and, as such, are in control of when the income is collected and the tax is paid! Are you beginning to see the forest through the trees? Your precious timber plantation is a naturally occurring IRA. This is a very powerful investment vehicle that can help you save on those yearly tax gains found in other passive investments.