My wife and I married earlier this year. Prior to our marriage, she qualified to make Roth IRA contributions, and did so ($2,500 earlier in 2002). However, as a married couple, we do not appear to qualify because we are over the income limit. Must she withdraw her contributions from earlier in the year when she was single?

Unfortunately, this is the way the IRS sends its congratulations. It doesn't really matter when the original deposit was made, or when you tied the knot. IRS considers you hitched for the entire year if you're married as of December 31, 2002. That means you both are subject to the Roth IRA limits for people who are married filing jointly.

If your joint adjusted gross income for 2002 is higher than $160,000, then she'll have to switch her 2002 Roth contribution to a traditional IRA (incidentally, the threshold is $110,000 for single people, and you can't invest in a Roth if you're married filing separately). For more details, see The Income Test for Roth IRAs. She won't need to transfer any money she invested in a Roth in previous years; she just needs to switch the money from 2002.

It's easy to make the change: Contact the brokerage firm or mutual fund company that administers your IRA and ask them to "recharacterize" her 2002 contribution (the fancy term for switching from a Roth to a traditional IRA). There won't be any penalty as long as she makes the switch before the deadline for filing your 2002 taxes. You'll need to file Form 8606 (PDF, 29 KB) with your taxes, explaining how much of the transferred money was from her original IRA investment ($2,500) and how much was from earnings. That will help her determine the tax basis when she finally cashes out the IRA.

Even though she can't withdraw traditional IRA money tax-free in retirement (and the contribution probably won't be deductible either; find out more), it still will grow tax-deferred until withdrawn. You and your wife can each contribute $3,000 to traditional IRAs in 2002 (including the $2,500 she's switching from the Roth).

Before making the switch, see if there's anything you two can do to lower your adjusted gross income below Roth's $160,000 threshold. You and your wife can lower your AGI by:

• Selling losing stocks
  
  
• Investing more pre-tax money in a 401(k)
  
  
• Moving more money into flexible-spending account (and spending it) before the end of the year
  
  
• If you own a business, buying new equipment or writing off additional expenses for 2002 will also lower your taxable income.

Other write-offs, such as job-related moving expenses, student-loan interest deductions and medical savings account contributions, also reduce your AGI. Take a look at Form 1040 (PDF) to see what other steps you can take to decrease your AGI, which is reported on line 33 (itemized deductions, for example, are calculated after line 33 and will not affect your AGI).

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