Ask the Fool

Spousal IRAs and Leveraged ETFs

Q: What’s a spousal IRA? — C.R., Alpharetta, Georgia

A: It’s a traditional or Roth IRA, but one belonging to a partner in a marriage with little or no income in a given year.

In general, IRAs may only be funded with earned income — not with, say, dividend or pension income, or an inheritance. So those who may be out of the regular workforce, perhaps in order to care for children or parents, are largely out of luck — unless they’re married.

A married person with little or no income may qualify for a “spousal IRA” if their spouse has sufficient earned income. The contribution limit for IRAs is $6,000 for the 2021 tax year, plus an additional $1,000 for those 50 and older. So most married couples filing jointly (there’s an income cap) may park between $12,000 and $14,000 in their IRAs for 2021. IRAs are a powerful way to save for retirement.

Q: What are leveraged ETFs? — B.W., Coeur D’Alene, Idaho

A: They’re stocklike investments that can prove ruinous to your wealth if you don’t understand them well.

To back up a bit, remember that in the finance world, the word “leverage” refers to debt. Leveraged ETFs will often track an industry or a stock index, investing in those stocks with a lot of borrowed dollars in order to amplify returns. A “2X” leveraged ETF, for example, will aim to deliver doubled returns.

The use of debt can amplify losses as well as gains, though, and leveraged ETFs are meant to be held for very short periods; holding on longer can lead to massive compounded losses.

Fortunately, most ETFs are not leveraged, and many are solid investments to consider.