My Growth-to-Passive Income Pipeline: Engineering a Self-Feeding Roth IRA

Bucking convention with my Roth IRA, I've built a strategy that transcends the traditional choice between growth and income. My current portfolio emphasizes building positions in emerging technology companies to reach share counts that enable efficient covered call writing. This systematic approach aims to create a foundation for generating both capital appreciation and options income.

This eight-position portfolio represents a deliberate balance between growth potential and future income streams. A strategic 80% allocation to high-volatility growth stocks will provide the foundation for option premium harvesting, while 10% in real estate investment trusts (REITs) compounds the income, and 10% cash provides strategic flexibility to capitalize on market dips.

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Let's examine how each component works together to create a tax-free income machine.

Growth engines

My growth stock picks are chosen for their high implied volatility (IV), which I'll use to generate income by selling covered calls. Here's how my portfolio breaks down:

Joby Aviation (NYSE: JOBY) represents 25% of my Roth IRA portfolio. The urban air mobility theme generates significant excitement and speculation, leading to high volatility in stocks like Joby. This large allocation reflects my conviction in Joby's potential within the urban air mobility industry. The stock's high IV also creates attractive opportunities for generating income through covered call writing.

SoundHound AI (NASDAQ: SOUN) also represents 25% of my portfolio. The future of artificial intelligence (AI)-derived voice solutions is inherently uncertain, creating a high degree of IV for that stock, making covered calls an attractive option with this equity.

Rocket Lab USA (NASDAQ: RKLB) constitutes 20% of the portfolio, reflecting my focus on the tremendous potential of the still nascent commercial space industry. Rocket Lab stock offers compelling covered call opportunities due to its exceptional IV, driven by its regular launch schedule and the natural volatility associated with spaceflight operations.

Intuitive Machines (NASDAQ: LUNR) represents a 10% allocation in my portfolio. The lunar exploration theme is inherently volatile, creating a high degree of IV for the stock. This volatility allows for a more tactical approach to covered call writing, capitalizing on short-term price swings.

Income compounders

My Vici Properties (NYSE: VICI) position anchors the REIT portion of the portfolio, with a 4% allocation. The gaming and entertainment REIT provides steady cash flow through triple-net leases with major casino operators.

The REIT's 5.81% dividend yield will compound harvested option premiums from the growth positions. Each reinvested dividend builds the foundation for future income growth, creating a steadily expanding stream of passive income.

My Medical Properties Trust (NYSE: MPW) stake represents a 3% allocation, capturing value in healthcare real estate. Current market pessimism offers an attractive entry point for building this hospital-focused REIT position.

Medical Properties Trust's towering 6.81% yield and essential healthcare infrastructure support long-term dividend sustainability. That said, this healthcare REIT does have a troubling recent history, requiring constant monitoring of its financial health.

My Rithm Capital (NYSE: RITM) holding rounds out the REIT exposure at 3%. The mortgage REIT's experienced management and diversified portfolio provide steady income generation.

Rithm's 8.69% dividend yield turbocharges the dividend reinvestment strategy. Each distribution reinvested compounds future income potential, creating a growing passive income stream.

Portfolio foundation

I plan to maintain a 10% cash reserve that serves as both a safety net and an opportunity fund. This capital acts as dry powder for market dips while ensuring I can build positions to the size needed for effective covered call strategies.

Having this ready cash keeps the portfolio nimble, which is essential when your strategy revolves around capturing volatility and managing risk. A decently sized cash position also acts as a natural buffer against the portfolio's inherent volatility.

Understanding the risks

The concentrated nature of these growth holdings magnifies both opportunity and risk. These emerging industries -- from flying taxis to lunar infrastructure -- face real challenges in regulation, technology development, and market adoption.

Each REIT position has unique risk considerations. Medical Properties Trust navigates tenant relationships and interest rate headwinds, while Rithm balances mortgage market dynamics.

Vici's gaming industry exposure could face pressure during economic downturns. Even the planned covered call strategy carries opportunity cost, potentially capping gains during strong market runs in exchange for current income.

Building my perpetual income machine

I've designed this eight-position portfolio to maximize tax-free wealth building within a Roth IRA. The concentrated structure keeps the strategy manageable while leveraging volatility for income generation. Once positions reach their target sizes, I'll begin writing covered calls to accelerate REIT dividend compounding, creating a self-reinforcing cycle of wealth creation.

This engineered approach offers advantages over passive exchange-traded fund (ETF) investing through precise position control and tactical premium capture. While it demands more attention than traditional strategies and carries higher risk, the potential for compounding returns through this self-feeding system is compelling. Each cycle amplifies the benefits of the last, transforming market volatility into lasting wealth -- all within the tax-advantaged Roth wrapper.

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George Budwell has positions in Intuitive Machines, Joby Aviation, Medical Properties Trust, Rithm Capital, Rocket Lab USA, SoundHound AI, and Vici Properties. The Motley Fool recommends Rocket Lab USA and Vici Properties. The Motley Fool has a disclosure policy.