Depositary Receipts Allow U.S. Investors to Closely Track Foreign Stocks

Q: Can you explain what American depositary receipts are and why they exist?

--R.M.C.

A: American depositary receipts, or ADRs, are issued by American banks and brokerages, and represent shares held by the banks’ and brokerages’ foreign offices. ADRs trade on major exchanges in the United States.

For example, instead of buying shares directly in Sony Corp., you can buy a Sony ADR, which trades on the New York Stock Exchange. Prices of the Sony ADR and Sony shares on the Tokyo Exchange are very close and generally fluctuate in tandem. ADRs, experts say, offer individual investors the chance to monitor their stocks closely, because ADRs are listed on U.S. exchanges and are carried in local newspapers. Further, the value of ADRs are listed in dollars, not foreign money, so the investor needn’t compute currency conversions.

However, a drawback of ADRs is that they are available for only a small, albeit growing, percentage of the stocks on the foreign exchanges. There are ADRs for many, if not most, of the world’s largest foreign companies. But if you are interested in a smaller, less-known concern, you’ll probably have to buy directly or do without.

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Q: I opened a Roth IRA this year with a $2,000 contribution. Now I’ve decided that I should convert my existing traditional IRA to a Roth. What do I have to do? Can I just transfer my old IRA to my Roth account?

--T.C.S.

A: You may not mix money transferred from a traditional IRA to a Roth IRA with money deposited directly into a new Roth IRA. Why? Because the government wants us to track the Roth rollovers separately from pure Roth IRAs to ensure that funds deposited into these accounts are held there for the minimum period--now it’s five years--before they’re withdrawn.

It shouldn’t be that big a deal for taxpayers or institutions offering Roths. You’ll have one Roth for any traditional IRA transfers and another for new annual contributions.

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Q: My husband and I are confused about the ceiling on adjusted gross income a married couple must come in under to qualify for a Roth IRA conversion. Is it $100,000 or is it $150,000?

--D.M.

A: Your confusion, which apparently is shared by many, concerns the income thresholds for Roth IRA conversions and those for contributory Roth IRAs. There are two separate adjusted gross income requirements for each of these transactions.

To qualify for converting an existing IRA to a Roth IRA, a taxpayer must have an adjusted gross income of $100,000 or less, regardless of whether he or she is married or single. Remember, this is simply to convert an existing IRA to a Roth.

To open a new Roth IRA with up to a $2,000-per-person contribution of after-tax money, married taxpayers filing a joint tax return must have an adjusted gross income of under $150,000. (Eligibility for Roth IRA contributions phases out at this point until ending completely for married taxpayers with an adjusted gross income of $160,000 or more.) Both spouses, working and nonworking, may contribute up to $2,000 each to a Roth IRA, assuming the couple meets the income requirements.

Single taxpayers may open a Roth IRA of up to $2,000 if their adjusted gross incomes do not exceed $95,000. (Eligibility gradually phases out as single taxpayers’ adjusted gross incomes approach $110,000, at which point it ends completely.)

For both single and married taxpayers, the ability to contribute to a Roth IRA also requires that there be

at least $2,000 per person of earned income for these retirement accounts. In other words, these savings accounts are aimed at working taxpayers, not the retired or others living on “unearned income.”

Please note this difference between “earnings” and “adjusted gross income.” If you are otherwise largely unemployed or without much in the way of earned income (i.e., retired or independently wealthy), you may open a traditional IRA or one of the new Roth IRAs only if you have at least $2,000 per year in actual earnings.

At the bottom end of the eligibility spread, the ability to contribute is a matter of simple earnings. At the upper end, what matters is adjusted gross income, which includes more sources and is often a somewhat higher figure than earnings.

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Carla Lazzareschi will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Or send e-mail to carla.lazzareschi@latimes.com.