Worried about stocks, some investors are putting their retirement money into something they're convinced will be plentiful in 2008: foreclosures and tax liens.
Using self-directed individual retirement accounts, investors are buying depressed real estate, making loans to private companies and buying up tax lien certificates on properties, which give the investors a government-determined yield that the homeowner pays to release the lien. If the homeowner doesn't do that within a prescribed time period, the investor receives the property.
A handful of firms specialize in helping clients make alternative investments in their IRAs, but industry players say it's still a tiny fraction of the overall IRA market.
Brian and Rosanne Wassom bought a Utah condo a couple of years ago with their combined IRAs, and now they're considering tax liens as they look for ways to be less reliant on the stock market for their long-term wealth.
"I got hammered in the Internet bubble," said Brian Wassom, 51, of Pleasanton, Calif., near San Francisco.
Cheryl Wolf, 47, invested in shares of Starbucks Corp. for her retirement account and did well - for a while. But when the shares started dropping, the Seattle woman started looking into alternatives.
In March, she took a portion of her retirement savings and lent it to a developer who was in the midst of converting an apartment complex into condominiums. It was a one-year loan paying 12 percent interest.
Neither Wolf nor the Wassoms expressed much concern about what the real estate downturn will mean for their retirement savings.
In fact, the downturn will provide more opportunities to invest in foreclosed properties and other distressed investments, said David Nilssen, chief executive for Guidant Financial Group, a Bellevue, Wash., provider of self-directed IRAs, including the IRAs for Wolf and the Wassoms.
Also driving interest is the use of alternative investments in Roth IRAs, in which investors use after-tax funds to invest and then withdraw them tax-free in retirement. This avoids having to pay ordinary income tax on property appreciation, and it's less complex because Roth IRAs aren't subject to required minimum distribution rules.
(Required distributions typically are paid from other funds in a traditional IRA if the property has not been liquidated by the time an investor has to take the distributions.)
For all the opportunities, however, many investors are likely to face losses in the real estate investments they've made in recent years.
"If you don't screen the investments very carefully, you can end up in trouble," said Nora Peterson, author of Retire Rich with Your Self-Directed IRA: What Your Broker & Banker Don't Want You to Know About Managing Your Own Retirement Investments.
If you're looking into tax liens, for example, keep in mind that if a homeowner files for bankruptcy protection, the tax lien certificate could be worthless, she said. That's because creditors or even other lien holders might be ahead of you in the collection line.
And the twin benefits that entice many investors into real estate - the leverage they can receive on appreciation from a small down payment and the mortgage interest deduction - generally are moot in an IRA. (A few banks will offer mortgages inside IRAs, but most investors typically buy property outright with their accounts.)
Hugh Bromma is the founder of the Entrust Group in Reno, Nev., one of the largest providers of administrative services to self-directed IRA account holders. Bromma has been burned himself on an alternative IRA investment - a $50,000 developer loan that was never repaid because of improprieties at the development company.
And he warns that many investors who dabbled in real estate deals in recent years will be burned as the shakeout continues.
Still, he believes alternatives are here to stay for a small segment of retirement account holders looking to avoid the stock market.
Critics say the investments can be costly in a number of ways, including high fees attached to the underlying investments and huge tax penalties if mistakes are made in setting them up.
"The biggest issue is self-dealing," said James Lange, a Pittsburgh estate planning attorney and an accountant who specializes in IRA planning. Investing in a home in which you live, or for your relatives, is prohibited.
"They'll buy a vacation home or a place where their mother can stay or a child in college," Lange said. "If your IRA is disqualified, the whole thing is taxable and there are penalties."
Janet Kidd Stewart writes for Tribune Media Services.