How can someone's IRA become a real estate developer?

The answer is simple. They have something called a self-directed IRA. It doesn't matter whether it is a regular IRA, a SEP (self-employed) IRA or a Roth IRA. Any of these could be administered by a trust company that specializes in allowing people to invest their savings in any number of businesses or assets.

IRAs have been around since 1974, when Congress offered tax benefits for these personal retirement accounts. From the beginning, sophisticated financial advisers have been using them to buy real estate for their wealthy clientele.

Actually, one can invest in just about anything -- foreign as well as domestic real estate, boats, investment companies and start-ups -- as long as the assets are not used by the individual investors or their immediate family. That's called self-dealing and isn't considered fair game for tax-free investments. And there are three types of investments that remain verboten: collectibles (furniture, art, jewelry), life insurance (tough to retire when you're dead) and stocks from S corporations (taxed as partnerships, they can't have tax-free investors).

There are alternatives to the big-name banks, and some regular folks do manage a self-directed retirement plan. These investment schemes can run the gamut from noble to notably wacky: One Pensco client had a friend who was a war veteran and wanted to travel the world, so the client used his retirement money to buy an RV, which he rented to his friend. A fisherwoman used her retirement funds to buy sablefish rights from the Department of Fish and Game and sublease them to fishermen. Pensco clients have also funded a number of blue-sky projects, including cancer research and a robot that defuses bombs.

Pensco, founded by Anderson in 1989, is one of about 20 companies nationwide that administer self-directed IRAs. Although they represent a minute percentage of the total IRA market, business is booming.

Indeed, as Uncle Sam searches for new ways to wean us off the Social Security teat, the government continues to promote do-it-yourself retirement through a myriad of legal clauses. (Recent lawsuits by devastated Enron pensioners have also lighted a fire under the technocrats' tushes.) Last month, Congress voted to allow individuals to roll their 401(k) accounts directly into Roth IRAs. Contribution limits to IRAs and Roth IRAs continue to rise (for SEP IRAs for people over 50 it's up to $44,000 a year). The government is even providing more security for these accounts: IRA accounts now carry FDIC insurance for up to $250,000.

Real estate lenders have come around as well. Two years ago, banks wouldn't finance loans for properties purchased through IRAs, so when people wanted to buy real estate with their IRAs they needed to come up with 100 percent cash. (Of course, this worked only for the very affluent.) Now Kansas-based North American Savings Bank offers IRA loans for real estate in 50 states.

Indeed, expert counsel is essential to avoid the fines and penalties that mistakes can trigger. Legally, the IRA fund (not its owner) not only buys the real estate but administers the property, so funds must be available in the IRA for maintenance and other real estate expenses. If IRA-funded real estate is at risk of foreclosure, the owner of the IRA can make a temporary loan, but he or she can't simply pay off the mortgage, without a massive penalty.

Still, after being burned by the stock market one too many times, some investors cleave to the idea of long-term real estate investing -- even in a down market. "Now it's a buyer's market," said Dave Luchsinger, a telecommunications analyst who turned around his retirement with a real estate IRA after seeing much of his 401(k) savings disappear into stocks like Enron. "I'll make money either way."

Edwina Baniqued