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Tax Cut software tells us that our 2002 traditional IRA contributions will be worth a $280 deduction for my husband and a $3500 deduction for me.

I'm intrigued by the option you referred to above. How does one treat the IRA as a tradional, deductible IRA and then also convert to Roth in 2003?

There are two separate issues: how you want to treat your 2002 contributions and what you want to do down the road.

In your husband's case one thing is crystal clear: He should recharacterize at least $3,220 of his 2002 contribution (and the earnings on it) as a Roth contribution. (IIRC you each made a $3,500 contribution.) One of the few no-brainers in tax law is the choice between a nondeductible traditional contribution and a Roth contribution. The IRA custodian has the necessary paperwork and formula for calculating the earnings. There will be a fee.

With respect to the other $280 of your husband's contribution and your entire $3,500, I'd leave them as deducted traditional IRA contributions on your 2002 return.

Now we look to the future. In any year that your AGI is under $100,000 you can convert to Roth any portion of your traditional IRA. You pay tax on the amount converted, but no penalty. The rules change in the year you turn 70 1/2, but I think that's a way off for you, so we won't worry about that now.

You'll find lots of discussion about the pros and cons of converting in the Retirement section of the Fool homepage.

If you need clarification on any of this, just holler.

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