The question at the heart of the roth conversion net investment income tax debate has a clean answer: a Roth conversion is not itself net investment income, so the converted dollars are never directly hit by the 3.8% surtax. The real exposure is indirect, because the conversion raises your MAGI and can pull other investment income over the threshold.
No. A Roth conversion is taxed as ordinary income, and IRC Section 1411(c)(5) excludes retirement-plan distributions from net investment income, so the conversion amount is never subject to the 3.8% NIIT. The catch: conversion income lifts your MAGI, which can push dividends, interest, and capital gains above the NIIT threshold and expose that other income to the surtax.
The short answer: no, the conversion itself is not taxed by NIIT (but it can still cost you)
Converted dollars are statutorily carved out of net investment income, so the 3.8% Net Investment Income Tax never applies to the conversion amount directly. The genuine risk is a second-order one. Because a conversion is included in modified adjusted gross income (MAGI), a large conversion can drag your other investment income, such as dividends, interest, and capital gains, above the NIIT threshold and expose that income to the surtax.
That distinction is the whole game. Understanding it lets you fold the NIIT cost into a multi-year Roth conversion plan rather than being surprised by it on a single year’s return. For the broader mechanics of the surtax itself, see our 2026 NIIT overview.
Talk With Craig Wear's Team
Craig has helped IRA millionaires save over $1 million each in unnecessary taxes. Find out if a Roth conversion strategy fits your retirement, with no sales pressure and no product pitch.
Why the converted dollars escape NIIT: IRC Section 1411(c)(5)
The exclusion is not an interpretation or a loophole: it is written into the statute. IRC Section 1411(c)(5) states that net investment income does not include any distribution from a plan or arrangement described in Sections 401(a), 403(a), 403(b), 408, 408A, or 457(b). Because a Roth conversion is a distribution from a traditional IRA or employer plan, it falls squarely inside that carve-out.
What actually counts as “net investment income”
Net investment income is a defined category, not a catch-all for every dollar of MAGI. It generally includes taxable interest, dividends, capital gains, rental and royalty income, non-qualified annuity income, and income from passive business activities. Wages, self-employment income, Social Security benefits, and, critically, qualified retirement-plan distributions are not net investment income.
Why IRA, 401(k), and Roth-conversion distributions are carved out
Congress excluded qualified-plan distributions because those accounts already face their own income-tax regime. Treasury regulations confirm the point: a conversion to a Roth IRA described in Section 408A is treated as a distribution excluded from net investment income. So whether you take an ordinary IRA withdrawal, satisfy a required minimum distribution, or convert to Roth, none of those dollars land in the NII bucket.
How a Roth conversion CAN trigger the 3.8% surtax: the MAGI trap
Here is where the “no” becomes “not directly.” The NIIT is calculated on the smaller of two numbers, and one of those numbers is driven by your MAGI. A conversion inflates MAGI without adding to net investment income, and that asymmetry is precisely what catches people. The conversion does not get surtaxed, but it can make your existing investment income newly reachable by the 3.8%.
The “lesser-of” formula
The NIIT equals 3.8% multiplied by the lesser of (a) your net investment income, or (b) the amount by which your MAGI exceeds the applicable threshold. If either number is zero, the tax is zero. That is why a retiree with no dividends or interest can convert a very large sum and still owe no NIIT: there is no investment income for the surtax to attach to.
Excluded from NII, included in MAGI: the asymmetry that catches people
The conversion amount raises (b), the MAGI-over-threshold figure, but never raises (a), the net investment income figure. So a conversion can lift the MAGI side of the “lesser-of” test high above your investment income, at which point your entire net investment income becomes the taxable base. The surtax lands on the dividends and gains, not on the converted dollars.
A dollar-for-dollar walk
Picture a household already sitting just below the threshold with some taxable dividends. Each conversion dollar lifts MAGI by one dollar. Once MAGI crosses the line, each additional dollar exposes one more dollar of the “MAGI minus threshold” figure, until that figure equals or exceeds the investment income. From that point, all of the investment income is trapped, and converting further adds no more NIIT.
The MAGI thresholds that trigger NIIT (2026)
The NIIT thresholds are set in statute (IRC Section 1411) and are not indexed for inflation, so they have stayed flat since the tax took effect in 2013. That fixed nature matters for planning: as incomes and portfolios grow over time, more households drift over the line each year without any change in the law. The 2026 figures are below.
| Filing status | 2026 MAGI threshold | Inflation-indexed? |
|---|---|---|
| Single / Head of Household | $200,000 | No |
| Married Filing Jointly | $250,000 | No |
| Married Filing Separately | $125,000 | No |
| Estates and Trusts | $16,000 (2026) | Yes (tracks top trust bracket) |
Note the outlier: the individual thresholds are frozen, but the estate and trust threshold is tied to the dollar figure where the top trust bracket begins, which does adjust ($15,650 in 2025 rising to $16,000 in 2026). Trusts reach the 3.8% surtax at a very low income level, which is one reason conversions are almost always modeled at the individual level.
Worked example: conversion that stays under the line = $0 NIIT
Consider an illustrative single filer with $15,000 of taxable dividends and interest and a base MAGI of $150,000 before any conversion. She converts $40,000, lifting MAGI to $190,000. Because $190,000 is still below the $200,000 threshold, the “MAGI minus threshold” figure is zero, the lesser-of test returns zero, and she owes $0 of NIIT despite holding investment income.
Worked example: conversion that pushes MAGI over the line
Now take an illustrative single filer with $20,000 of dividends and a base MAGI of $170,000. He converts $60,000, lifting MAGI to $230,000, which is $30,000 over the $200,000 threshold. The NIIT applies to the lesser of net investment income ($20,000) or the MAGI excess ($30,000). The smaller figure is $20,000, so the surtax is 3.8% multiplied by $20,000, or $760. Note that the $760 sits on the dividends, not on the $60,000 conversion.
NIIT vs. IRMAA vs. ordinary income tax: three separate hits from one conversion
A single conversion can set off three distinct costs, and conflating them leads to bad math. The conversion itself is taxed as ordinary income, which is its main and usually largest cost. On top of that, it can add NIIT on your other investment income, and it can raise Medicare premiums two years later through IRMAA. These are separate systems with separate rules.
| Cost | What it taxes / affects | Applies to the conversion dollars? |
|---|---|---|
| Ordinary income tax | The converted amount at your marginal rate (10% to 37%) | Yes, directly |
| NIIT (3.8%) | Your other net investment income, if MAGI crosses the threshold | No, only indirectly via MAGI |
| IRMAA | Medicare Part B and Part D premiums, two years later | No, but MAGI-driven surcharge |
IRMAA is not the same thing as NIIT, though both key off MAGI. NIIT is a 3.8% tax on investment income; IRMAA is a premium surcharge on Medicare Parts B and D that uses a two-year lookback. A conversion this year can raise premiums in the year you turn the return into a Medicare-premium determination, which is generally two years out. For the interaction with required withdrawals, see our note on required minimum distributions in 2026.
How to convert without triggering NIIT (planning moves)
Because the exposure is entirely a MAGI-threshold question, most of the planning levers involve controlling how much MAGI you recognize in any single year. None of the moves below is right for every situation, and each interacts with brackets, IRMAA, and your broader plan. Many investors evaluate them across a multi-year window rather than one year at a time.
Partial conversions and laddering
Splitting one large conversion into several smaller annual conversions can keep MAGI at or below the threshold in each year, so the “MAGI minus threshold” figure stays at or near zero. A conversion ladder is a common structure for this. Our guides on how much to convert and the conversion ladder for early retirees walk through the sizing.
Converting in low-investment-income years
Because NIIT is capped at your net investment income, converting in a year when that income is low shrinks the surtax base to begin with. A retiree who has harvested losses, holds mostly tax-deferred assets, or has little taxable interest may find that even a MAGI-crossing conversion produces modest NIIT, because side (a) of the lesser-of test is small.
Sequencing around large one-off MAGI events
A property sale, a large realized capital gain, or a big bonus can consume threshold headroom on its own. Scheduling conversions away from those years, rather than stacking them, keeps a single year from crossing the line by a wide margin. Coordinating the conversion with the December 31 conversion deadline gives room to right-size the amount late in the year.
Where it is reported: Form 8960 and Schedule 2
The NIIT is computed on IRS Form 8960, which walks through your net investment income and your MAGI to apply the lesser-of formula. The resulting tax flows to Schedule 2, line 12, and then onto your Form 1040. It is a federal tax only. States generally do not levy their own 3.8% NIIT, so the surtax is a purely federal line item on your return.
Work with Q3 Advisors
Q3 Advisors is a registered investment adviser focused on retirement tax planning. This page is educational and is not advice; consult a qualified professional.
Frequently asked questions
What are the exact 2026 NIIT MAGI thresholds, and are they indexed for inflation?
For 2026 the thresholds are $200,000 for single and head-of-household filers, $250,000 for married filing jointly, and $125,000 for married filing separately. Estates and trusts reach it at $16,000. The individual figures are set in statute and are not indexed for inflation, so they have not changed since 2013.
What is the NIIT rate and the precise “lesser-of” formula?
The rate is 3.8%. It is applied to the lesser of two figures: your net investment income, or the amount by which your MAGI exceeds the threshold for your filing status. Written out: NIIT equals 3.8% multiplied by the smaller of (net investment income) or (MAGI minus the threshold). If either figure is zero, the tax is zero.
Which IRC section excludes Roth conversions from net investment income?
IRC Section 1411(c)(5) provides the exclusion. It states that net investment income does not include distributions from plans described in Sections 401(a), 403(a), 403(b), 408, 408A, or 457(b). Treasury regulations confirm that a conversion to a Roth IRA under Section 408A is a distribution excluded from net investment income, so the converted amount is never in the NII base.
Does the Roth conversion amount itself ever count as net investment income?
No. Distributions from IRAs, 401(k)s, 403(b)s, and Roth conversions are statutorily excluded from net investment income. What does count is investment income such as taxable interest, dividends, capital gains, rents, royalties, non-qualified annuity income, and passive business income. A conversion is taxed as ordinary income and can raise MAGI, but it is never itself net investment income.
Worked example: an MFJ couple with $30,000 in dividends and an $80,000 conversion
Assume an illustrative joint-filing couple whose $80,000 conversion lifts MAGI to $320,000, which is $70,000 over the $250,000 threshold. The NIIT base is the lesser of net investment income ($30,000) or the MAGI excess ($70,000), so $30,000. The surtax is 3.8% multiplied by $30,000, which equals $1,140, and it falls on the dividends, not the conversion.
How much can a partial-conversion ladder change the NIIT?
Consider an illustrative joint filer with $20,000 of dividends and a base MAGI of $240,000. A full $100,000 conversion lifts MAGI to $340,000, trapping the $20,000 of investment income for a NIIT of $760 (3.8% of $20,000). Trimming the conversion to $10,000 keeps MAGI at $250,000, leaving zero MAGI excess and $0 NIIT that year, a $760 difference in this scenario.
What is the maximum NIIT a converter could pay in one year?
The surtax is capped at 3.8% of net investment income, because that figure is one side of the lesser-of test. It is never charged on the conversion amount. So the ceiling is 3.8% multiplied by your total net investment income for the year; a converter with no dividends, interest, or gains can owe no NIIT no matter how large the conversion.
How much can a Roth conversion raise Medicare premiums through IRMAA?
IRMAA uses a two-year lookback, so a 2026 conversion can affect 2028 premiums. In 2026 the surcharge starts above $109,000 (single) or $218,000 (joint) MAGI. Crossing the first tier adds $81.20 per month per person to Part B, and higher tiers add up to $487.00 per month, plus a separate Part D surcharge.
Did the 2025 OBBBA law change the NIIT, and do states impose it?
No. The 2025 budget law (P.L. 119-21) made the 10% to 37% ordinary brackets permanent and added a temporary senior deduction, but it did not change the NIIT rate, the thresholds, or the retirement-distribution exclusion. The NIIT remains a 3.8% federal-only tax; states generally do not levy their own version, and it is reported on Form 8960.
