3651 / Are IRA distributions subject to the 3.8 percent net investment income tax?

Distributions from traditional and Roth IRAs are not subject to the 3.8 percent net investment income tax (also known as the Medicare contribution tax) imposed under the Affordable Care Act. The tax equals 3.8 percent of the lesser of a taxpayer’s net investment income for the taxable year, or the excess (if any) of the taxpayer’s modified adjusted gross income for the year, over a threshold amount ($200,000 for a taxpayer filing an individual return and $250,000 for a taxpayer filing jointly).¹

IRC Section 1411 specifically excludes distributions from both traditional and Roth IRAs and other qualified plans from the definition of “net investment income.”

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Planning Point: While taxable distributions from traditional IRAs are not subject to the net investment income tax, they do increase a taxpayer’s modified adjusted gross income (MAGI) for the year. A higher MAGI may expose taxpayer’s other investment income (or increase taxpayer’s exposure) to this 3.8 percent tax. Planners should consider the effect of an IRA distribution on a client’s MAGI and exposure to the net investment income tax.

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1. IRS Publication 550 (2018).