Lil Miller-Fox's individual retirement account has three bedrooms, two baths and a two-car garage.
Better yet, the rental house in a gated community in Sebastian, Fla., not far from the Atlantic isn't run by an advisor that charges exorbitant monthly fees. Rather, Miller-Fox makes all the decisions, and she doesn't have to pay anyone to execute them.
Her IRA is called a "checkbook IRA," an investment vehicle created nearly 20 years ago in a landmark court ruling that essentially said, it's your money, so you can run the show -- as long as you follow the rules.
Let's step back a moment: Not many people even know you can invest your retirement savings in real estate. But under Section 408 of the Internal Revenue Code, as long as you don't benefit directly, you are allowed to put some or even all the funds you set aside in a tax-sheltered IRA into real estate.
They're called self-directed IRAs because you can move your funds around. But until a 1996 court case, every step you wanted to make had to be carried out through a costly custodian. You could not take direct control. Every time you wanted to mow the grass or pay the bills, you had to pay a trustee to do it.
In the 1996 case of Swanson v. Commissioner, the tax court gave its blessing to a new type of self-directed IRA structure -- the checkbook IRA -- that is much simpler than investing through a regular custodial account.
Under the checkbook format, the IRA is set up as a self-directed account that's capitalized by funds rolled over from your current retirement account. Then, a limited liability company is created in which your new IRA purchases all the membership units. Now, your money is held in an LLC and you are ready to invest at your discretion.
That's what appealed to Miller-Fox. She's a self-proclaimed "real estate nut" who operates PrivateCommunities.com, a website that compiles information about many of the country's master-planned properites.
"I love real estate," she says. "I feel much more comfortable investing in tangible real estate than stock and bonds and that sort of thing. And this puts me absolutely in full control."
Under the rules, savvy real estate investors like Miller-Fox can buy, sell and manage domestic, foreign, commercial, residential and rental properties using money invested in their tax-deferred retirement account. The funds are held in a normal business account, and as the account's manager, you can sign contracts and write checks on the account, just like any other business.
The speed at which you can move opens up a slew of investment opportunities, such as snapping up foreclosures or tax liens -- or even a house that has just come on the market in a prime spot near the ocean or in the mountains. And, says Miller-Fox, "it's a great way for people to finance their retirement homes long before they are ready to use them."
There still are restrictions, of course. You can't use the property as your own residence or vacation home, and that applies not only to you but also to anyone in your family. And you can't take money out of your IRA account until you are 59 1/2 without incurring a big tax bite, just like if you took money out of a regular IRA.
Otherwise, rental income is tax-deferred because it is held in a tax-deferred IRA. And there is no capital gains tax when you sell an IRA-owned property.
A few other ground rules:
-- You can sell a house and purchase another one, and you can buy more than one property at a time. But any property purchased by your IRA is owned by your IRA, not you individually.
-- You can invest in raw land, real estate contracts or the trust deeds that back mortgages. And if you don't have enough money to invest or your own, you can pool your resources with others in the same boat.
-- Any money used to buy a property with your IRA has to come directly from your IRA, not you personally, and you can't be reimbursed by your IRA. This includes earnest money and closing costs, say Lorraine and Richard Walls, a couple from Midlothian, Va. who use their retirement accounts to buy investment properties in southwest Florida.
-- Similarly, costs associated with remodeling and carrying real estate need to be paid directly from your account. And any income from your properties has to flow back to your IRA.
-- You cannot do business with family members, including spouses, parents, children, grandparents, grandchildren and great-grandchildren.
There are still fees, too. There's a charge to set up the LLC, and you still must have a custodian. But you don't have to pay the custodian to execute each and every move you want to make, or to collect the rent and pay the bills. Consequently, the fees are far less than investing in real estate via a typical self-directed IRA.
How much less? Charges vary, but according to Guidant Financial, a self-directed IRA custodial firm based in Bellevue, Wash., you can save thousands in traditional transaction and asset-based fees by acting as your own IRA broker/custodian.